Why Tesla (TSLA) Initially Fell on an Earnings Beat, And What the Future Holds

Close-up of Tesla logo
Credit: Moose -

Tesla (TSLA) released their Q3 earnings after the market closed yesterday. They reported earnings of $1.86 per share, a 146% increase on the same quarter last year and a beat of the expected $1.62. Revenues were, depending on whose estimates you use, either just above or below the expected number, so basically in line at $13.76 billion, which represented a 57% increase from last year.

Those are good numbers -- great, even -- and yet in a move that will be familiar to all who follow the stock market, the good earnings prompted a drop in the stock. As I wrote this, TSLA was down around 1% from yesterday’s close in premarket trading and had been even lower than that earlier in the morning; Tesla's stock price did rebound by the time this article went live, but there are still essential takeaways investors can learn from its dip this morning. The questions for investors are why that happened and what it all means for the stock in the future.

The "why" can basically be summed up as "buy the rumor, sell the fact."

TSLA chart

Over the last two months, TSLA has gained 28.5%, even after a pullback from the highs of a couple of days ago. That tells us that, as good as the earnings report was, traders and investors had anticipated at least that, if not even better. In that context, even a beat can be seen as slightly disappointing.

However, the real reason for the drop is more likely to be that a good amount of the money that has flowed into the stock over the last few weeks has come from traders rather than investors. That “fast money” is looking for an opportunity to take a profit and a beat provides that. To some extent, after a run up like that, selling was inevitable.

Going forward, though, the path of TSLA will be decided by longer-term investors rather than fast money, and this report contained plenty of reasons why a bounce back and move significantly higher is on the cards as they do their calculations and analysts adjust their long-term expectations.

For years, the bear argument against Tesla has been that for all their growth, they weren’t making much money. That argument should now be considered wrong. Automotive gross margins last quarter were over 30%, demonstrating enormous pricing power in the face of rising input costs, as demand for vehicles stayed strong. That is an important factor for the future given general worries about an inflationary environment and it is a testament to the wisdom of big investments in the so-called giga factories the company has built to increase control of its own supply chain.

Nor did the good news end there from a long-term perspective. Regulatory credits, previously a big part of Tesla’s earnings but something that, by their nature can’t be relied on in the future, accounted for only $279 million last quarter, around 20% less than analysts had expected. Add in a 44% increase in sales in China, an important market for Tesla, and it is hard to find any weakness in these numbers in terms of the company’s long-term growth prospects.

Those prospects are based on some pretty simple numbers. Tesla has around a 25% share of the global EV market and while that number can be expected to fall as seemingly every auto manufacturer in the world begins to catch up with Tesla, EVs still only account for around 4% of global vehicle sales. Obviously, even if market share falls, there is massive room for expansion of sales and profit over the next decade or so.

At the end of the day, Tesla's enormous potential will determine the price of its stock. Long-term investors should ignore the overnight moves and focus on the potential of a market leader in a field that can expand to ten or fifteen times its current size in coming years and continue to see pullbacks created by trading dynamics as opportunities to buy at a discount.

Disclaimer: The author is long TSLA, has been for some time, and will remain so for some time to come

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Martin Tillier

Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.

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