Tesla earnings: Model 3 production, demand under the microscope

Through delays, recalls, and wildly optimistic projections, Wall Street has stuck with Tesla Inc. shares, which have gained three times as much as the benchmark this year.

Tesla TSLA, -3.42% is expected to report a third-quarter loss after the bell Wednesday, but that too is likely to be brushed off.

All eyes will be on whether the company can make a good case that it has worked out all the kinks with the production of the Model 3, its first electric car aimed at the masses.

Moreover, if Tesla is able to show that demand for the Model 3 continues to be strong and that the market for its luxury vehicles is not reaching saturation, investors will look past the quarterly numbers, said Bill Selesky, an analyst with Argus Research.

Production shortfalls could become more of a concern in 12 to 18 months, but right now investors are more interested in hearing from the demand side.

“That’s going to be the key factor,” Selesky said. “Most people realize the production ramp will be difficult to get to.”

Here’s what to expect from Tesla’s earnings:

Earnings: Analysts surveyed by FactSet expect Tesla to report an adjusted loss of $2.31 a share in the quarter, versus adjusted earnings of 71 cents a share in the third quarter of 2016. Tesla has posted three consecutive quarterly losses.

Estimize, a crowdsourcing platform that gathers estimates from Wall Street analysts as well as buy-side analysts, hedge-fund managers, company executives, academics and others, has projected an adjusted loss of $2.14 a share.

Revenue: The FactSet revenue consensus is $2.94 billion, which would be down from $2.30 billion in the same quarter last year. Estimize is projecting revenue of $2.97 billion.

Stock price: Tesla’s stock has performed strongly despite the recent ups and downs. Shares have gained more than 52% this year, compared with gains of around 14% for the S&P 500 index SPX, -0.57% and 18% for the Dow Jones Industrial Average DJIA, -0.59% That’s also nearly double the gains for shares of competitor General Motors Co. GM, -3.09% and a contrast with losses of 1% for Ford Motor Co. F, -1.52%

Other issues: Despite the share run so far this year, this has been a humbling month for Tesla. The stock is down 4.5% in October, an aftershock of news earlier in the month that Tesla delivered only a fraction of the Model 3 sedans that Chief Executive Elon Musk had promised.

At the time, Tesla pinned the slower-than-expected Model 3 production ramp to “bottlenecks” but reiterated there were no fundamental issues with production or the supply chain and that it knew what had to be fixed.

Tesla delivered 220 and produced 260 Model 3s in the third quarter. Musk had said that he would expect to see production increase to 1,500 Model 3s by September, with plans to dial that up to 5,000 by the end of the year and 10,000 a week by the end of 2018.

Tesla will need to produce anywhere from 1,200 to 1,700 Model 3 vehicles a day depending on how long it wants its work week to be to clear the Model 3 backlog (Tesla has said preorders hover around 450,000) and book the associated revenue in the span of 12 months, said Rebecca Lindland, an analyst with Cox Automotive.

“This will be extremely difficult unless they start to get production really rolling,” she said. “A much more likely scenario is two full years to clear the backlog, but will people at the back of the line wait an additional year? I’ll be curious to see what leaks about the abandonment rate of the Model 3 deposits. I know I’m having second thoughts.”

Tesla is also juggling other major initiatives, including the launch of a semi truck next month (a project that got delayed from September) and securing a deal to set up a factory in China, as reported by The Wall Street Journal this week, citing people familiar with the plan.

That’s in addition to other projects Musk is working on, including Space X, a privately held rocket company.

“I am a huge fan of the guy, and I think everyone wins if he succeeds. But there does come a time when even Wall Street will be expecting Tesla to generate profits,” Lindland said.

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