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Tesla reports earnings after the bell — analysts want updates on China and vehicle margins

Key Points
  • Tesla is scheduled to post second-quarter results after the bell Wednesday.
  • Analysts are looking for answers about automotive gross margins, the new factory in Shanghai and when the company will unveil its "cyberpunk" pickup truck.
Elon Musk, co-founder and chief executive officer of Tesla Inc., speaks during an unveiling event for the Tesla Model Y crossover electric vehicle in Hawthorne, California, U.S., on Friday, March 15, 2019.
Patrick T. Fallon | Bloomberg | Getty Images

Tesla is set to deliver its second-quarter results Wednesday after the bell, and investors are eager to see how CEO Elon Musk's measures to streamline the business are affecting profitability.

Revenue in the quarter likely jumped 60% from a year earlier to $6.41 billion, according to an average estimate of analysts polled by Refinitiv. The company's loss per share likely narrowed to 40 cents a share from $3.06 a share.

Tesla's automotive gross margins will be a closely watched number. The electric car company has reined in production of its most expensive Model S and Model X vehicles, and shifted the focus to moving a high volume of Model 3s instead.

Itay Michaeli, a director at Citi Research, wrote in a note Monday that automotive gross margins in the range of 21% to 23% would be in line with expectations but "anything materially lower would support the bear case on Tesla's profitability, and anything materially higher would support the bull case." He has a sell rating on the stock and a price target of $191 ahead of earnings.

Tesla shares have dropped 22% this year, trading around $260 on Wednesday.

Michaeli said he also wants to know how much sales of regulatory credits contributed to Tesla's automotive gross margins in the second quarter. Tesla struck a deal with Fiat Chrysler to sell hundreds of millions of euros worth of regulatory credits to offset carbon dioxide emissions from the Italian carmaker's vehicles.

In earlier guidance, Tesla executives said the company would return to profitability in the third quarter and become free cash flow positive in the second half of the year. They also said Tesla was aiming for 25% automotive gross margins (on a non-GAAP basis), and expects full-year deliveries for 2019 to reach at least 360,000 vehicles.

Looking for positive guidance

Michaeli said it would be a good sign if Tesla can confirm that prior guidance.

"We think there's still a fair amount of skepticism around Tesla achieving anything above the low-end of its delivery range," he said. "So a confident reiteration perhaps with supportive commentary on the pace of July deliveries would probably be received well."

Beyond the balance sheet, Musk will likely face questions about Tesla's factories in the U.S. and a new one under construction in Shanghai.

Joseph Osha, an analyst at JMP Securities, wrote in a note Tuesday that drumming up demand shouldn't be a problem for Tesla through the second half of 2019, but manufacturing constraints are likely to represent a big hurdle, once again. Osha has a market outperform rating on the stock and a price target of $347.

"We think it's possible for Tesla to free up floor space for more Model 3 output in Fremont at the expense of S/X output, and we expect that will also be the approach to supporting initial Model Y output," Osha wrote. He also predicted that Tesla may be able to churn out a few thousand cars in Shanghai by the end of the year but could struggle with high-volume production until that factory comes fully online in 2020.

Investors are more confident

Here's how Musk addressed what he views as the key issues at the shareholder meeting in June:

"If I was an outside investor I would really focus on two things: What is the timeline to full self-driving. What is your plan to scale battery production and get the cost per kilowatt hour down." He said that Tesla would host a "Battery Day," and unveil its hotly anticipated "cyberpunk" pickup truck this year.

Tesla said earlier this month that it produced 87,048 vehicles and delivered 95,200 in the second quarter, a best for the company and in line with its guidance.

Hitting production and deliveries guidance for the second quarter after a lackluster start to the year helped boost investor confidence. While the shares are down for the year, they've risen about 16% from July 2, the day of its vehicle production and deliveries report.

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