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Tesla's massive stock rally faces a moment of truth as the company reports earnings


Tesla CEO Elon Musk speaks during the Tesla China-made Model 3 Delivery Ceremony in Shanghai.

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Tesla shares have skyrocketed by about 120% since the electric car maker last delivered an earnings report in October, and investors eagerly anticipate the company’s fourth quarter results, which it is scheduled to report on Wednesday.

Wall street is expecting Tesla to report non-GAAP earnings per share of $1.72 and revenue of $7.02 billion, according to a survey of analysts by Refinitiv. (Estimates varied quite widely: EPS estimates ranged from $0.80 to $2.57, and revenue estimates ranged from $6.46 billion to $7.54 billion.)

Tesla shares took off primarily on the company’s outlook in China. CEO Elon Musk started delivering cars from a new vehicle factory in Shanghai in January, with several ceremonies hyping this achievement on social media platforms from Weibo to Twitter.

The company also reported deliveries of 112,000 vehicles globally during the fourth quarter, a personal best for Tesla. That number significantly topped Wall Street estimates, and hit the low-end of Musk’s year-end sales goal.

Other factors included fans’ excitement over Tesla’s Cybertruck design, which was revealed in November, and the company’s continued over-the-air software updates, which Musk promised would bring improvements and new features to customers’ cars, including enhancements to Autopilot and new games including Stardew Valley.

CNBC’s Jim Cramer declared he had become a “true believer,” in Tesla in December 2019. Several Tesla bulls have raised their price targets, while shorts covered.

The rally continued last week as CEO Elon Musk drew accolades from President Donald Trump. He called Musk “one of our great geniuses” in an interview with CNBC’s Joe Kernen, comparing the CEO to Thomas Edison, and adding, “We have to protect all of these people.”

What could go wrong?

The recent rally does not guarantee the road ahead will be easy for Tesla, however. Skeptics point to unit sales declines in mature markets and margin pressure, among other risks.

Darius Brawn, a hedge fund veteran who previously worked as a portfolio manager for SAC and Citadel, told CNBC, “Tesla’s share price has come totally unhinged. Pundits’ attempts to rationalize aside, the stock has more in common with dutch tulip bulbs at the moment than it does to Tesla’s actual prospects.”

Of specific concern for Brawn was the company’s use of finance lease arrangements. These “effectively overstate free cash flow, but very few do the required analysis to figure this out,” he said.

Brawn noted that U.S. unit sales were down materially year-over-year in both the third and fourth quarters of 2019, according to Tesla’s Q3 filings and Q4 estimates by InsideEvs. He cautioned investors to watch out for a similar “glide path” in existing markets for the company in Europe in 2020, like the Netherlands. In an earlier cycle, “Europe masked the US decline, and now China is needed to mask Europe’s coming decline,” he said.

Tesla has touted its prospects in China, but the costs of operating its new factory there could begin to hit the company’s bottom line in the first quarter of 2020, Brawn added.

In a note to investors ahead of this week’s earnings report, JMP Securities’ Joseph Osha wrote, “It has been remarkable to watch the stock appreciate, and even though we think some of the move is merited given TSLA’s competitive position, we do not think the stock is attractively valued at this point. Any stock sitting on a 25x multiple of EBITDA is vulnerable to negative surprises, and even considering our above-consensus unit outlook we believe the market is more likely to react to a near-term reversal in gross margins.”

One factor putting pressure on Tesla’s margins? Most of the vehicles it delivered in the fourth-quarter were Model 3s, and not its higher-priced Model S and Model X electric vehicles, and a good portion were exported from the U.S. to Europe and China.

Osha wrote that big questions loom around demand for Tesla’s luxury electric vehicles the world over, even in China. He cautioned that the Chinese auto market — while massive — has been weak, and may suffer further as a result of the coronavirus health epidemic which is effecting Shanghai, where Tesla’s new factory is based.

Wedbush Securities’ Dan Ives, who remains bullish on Tesla, downplayed concerns about coronavirus and said it would probably only cause Tesla brief delays.

Ives wrote, “The company has the most impressive product roadmap out of any technology/auto vendor around (which the market cap reflects vs. its traditional auto competitors).” He added, “We believe the China opportunity is worth at least $100 per share ($300 in a bull case scenario) and potentially more and remains the key fuel in the growth engine along with Europe Model 3 demand, which looks healthy from a pent up demand perspective through at least the next 3-4 quarters based on our analysis.”

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