A positive quarter would mark the first time it shows profit in four straight periods

By Tim Higgins 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (July 22, 2020).

After Tesla Inc.'s lone U.S. assembly plant went offline this spring as authorities in California shut things down to slow the spread of the coronavirus, many Wall Street analysts doubted the second quarter would be profitable.

But then the electric-auto maker delivered a surprising number of new cars and sport-utility vehicles during the three months that ended on June 30, reporting earlier this month a much smaller decline than analysts had forecast. The company's shares have continued to soar since, in part, on increased expectations that Chief Executive Elon Musk will pull off another Hail Mary performance and report a profit Wednesday.

"Tesla being profitable has almost become a foregone conclusion in terms of what's baked into the stock," Dan Ives, an analyst for Wedbush Securities, said in an interview. "If it's anything other than that, it would be viewed as a huge negative."

Tesla didn't respond to a request for comment.

A positive earnings report would mark the first time that 17-year-old Tesla has reported four consecutive quarters of profit and would qualify it for consideration in the S&P 500. Inclusion in the prestigious benchmark gauge of U.S. equities would drive index funds to include the company's shares in their holdings.

The consensus estimate Monday was still for a quarterly loss, but it has narrowed in recent weeks and would represent a sharp year-over-year improvement. Analysts surveyed by FactSet, on average, predict Tesla will lose $228 million in the quarter; on an adjusted basis, they expect a 14-cent loss per share. In comparison, analysts were projecting a per-share adjusted loss of $1.43 in late May, after the company's assembly factory in California had been shut for several weeks, and the company lost $408 million in the year-earlier quarter.

In the past five years, four of Tesla's six profitable quarters have come as surprises to analysts who had predicted losses, according to FactSet data. The unexpected profit in the third quarter of last year, for example, helped change the company's standing among investors, who had grown frustrated with Tesla's performance in the first half of 2019 over slowing sales and troubles exporting the Model 3 compact car overseas.

Shares, which had fallen to a low of $176.99 in June 2019, climbed in the final months of the year, buoyed by the quarter. That strength has mostly continued, with the stock quadrupling in 2020, amid a string of positive achievements, such as Tesla's factory in China opening. Shares closed Monday at $1,643.

The company's market value is now more than $300 billion, enough to overtake Toyota Motor Corp. in recent weeks as the world's most valuable auto maker.

Tesla said July 2 that it delivered 90,650 vehicles in the second quarter, a 4.9% decline from the year-earlier quarter that was much smaller than the 24% drop analysts anticipated because of the pandemic. The performance was helped by Mr. Musk pushing to resume California production in early May and the company getting as many cars delivered in the final weeks of June as possible.

The overall industry hasn't fared as well. Global sales may have declined 34% in the period, according to an estimate by researcher LMC Automotive.

Tesla has been helped, in part, by good timing. The company began production late last year in Shanghai at its first assembly plant outside of the U.S., giving it capacity to make cars for important China buyers while its home market struggled with the impact of the coronavirus.

Because of lower labor costs in Shanghai compared with Tesla's factory outside of San Francisco in Fremont, Calif., Mr. Ives estimates that China-made Model 3s are 10% to 15% more profitable than those made in the U.S. "That's one of the linchpins of the quarter," he said.

In the U.S., Tesla seems to be helped by the arrival of the Model Y compact SUV, which began deliveries in March. While Tesla hasn't broken out results of the Model Y, new vehicle registrations for 22 states show more than 3,000 of its new SUVs sold during the period, according to data from researcher Cross-Sell LLC. Data for all of the states isn't available yet.

Among Mr. Musk's efforts to steer Tesla through the uncertainty of Covid-19, the company cut salaries, furloughed some workers and sought rent breaks. Tesla also cut the prices of its vehicles during the period as it faced rivals using large incentives to encourage shoppers.

Revenue in the quarter is expected to fall 19% to $5.15 billion, according to analysts, in part because the average prices of the vehicles declined. The average selling price of vehicles sold in the past quarter is estimated at $54,000, compared with almost $56,000 a year earlier.

Barclays PLC's Brian Johnson is one of the analysts who now expects Tesla will eke out a profit for the second quarter. He told investors in a note that the money the company makes from selling regulatory tax credits, which it gets from the sale of electric vehicles, could contribute. Those credits helped the company turn a $16 million profit in the first quarter, when analysts expected a loss.

Analysts expect 2020 to be the first time Tesla achieves full-year profit through the end of December, though Mr. Musk's goal of increasing deliveries by more than 36% this year will be a challenge because of Covid-19. In April, Tesla backed off from that forecast, saying it would give an update with second-quarter results.

Critics point to Tesla lowering prices during the second quarter and a recent price cut to the Model Y as signs that demand is loosening. Given Tesla's flexibility in accounting for regulatory tax credit earnings, short sellers such as David Rocker, a retired hedge-fund manager, said it shouldn't be surprising if Mr. Musk shows a profit.

"The real surprise is why Tesla has been steadily cutting prices on its cars if demand is as strong as it is claimed," he said.

Write to Tim Higgins at Tim.Higgins@WSJ.com

 

(END) Dow Jones Newswires

July 22, 2020 02:47 ET (06:47 GMT)

Copyright (c) 2020 Dow Jones & Company, Inc.
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