Tesla Earnings: What to Look For

Tesla Inc. (TSLA), the electric car manufacturer, is coming off a breakthrough year in which it posted a fifth consecutive quarter of profitability for the first time, joined the S&P 500, and became the word's most valuable automaker as its stock price soared. It also made CEO Elon Musk the richest man on the planet. But despite that success, Tesla's global market share remains minuscule, its sales are tiny compared to the biggest automakers, and skeptics say Tesla's stock is drastically overpriced. Its price-to-earnings ratio is a lofty 1,616 times earnings.

Given that lofty valuation, investors will be looking for strong financial results when Tesla reports earnings on January 27, 2021 for Q4 FY 2020. Analysts are expecting a significant increase in adjusted earnings per share (EPS) on strong revenue growth compared to the year-ago quarter.

Another key metric of interest to investors is Tesla's vehicle deliveries, whose results for the fourth quarter were released earlier this month. The number of vehicles the electric automaker delivered during the fourth quarter increased dramatically compared to the same quarter a year ago.

Shares of Tesla skyrocketed in 2020. The stock's superior performance over the past year was briefly interrupted by the pandemic-induced market crash between late February and late March 2020 and a significant pull-back between late August and early September. But that didn't stop Tesla's shares from posting a total return of 672.1% over the past 12 months, far above the S&P 500's total return of 16.0%.

A driver of the stock was Tesla's success in posting more consistent profits after years of erratic earnings performance. Adjusted EPS rose 105.2% in Q3 FY 2020, marking the fifth consecutive quarter of profitability. Revenue rose 39.2%, its sharpest increase since Q2 FY 2019. Tesla noted that revenue growth was mainly driven by substantial increases in vehicle deliveries as well as growth in other parts of its business.

Results for Q2 FY 2020 were mixed. Revenue fell 4.9%, which is only the second quarter of declining revenue in at least 15 quarters. However, Tesla posted positive adjusted EPS compared to an adjusted loss per share in the year-ago quarter. To be sure, Tesla's positive Q2 earnings were not fueled by strong operating results. Instead, they were boosted by sales of zero-emission regulatory credits to other automakers, who need those credits to avoid penalties. Analysts were expecting Tesla to post a loss in Q2 FY 2020.

The second quarter also marked the fourth consecutive quarter of positive GAAP earnings for Tesla, which qualified the company's stock for inclusion in the S&P 500. Originally passed over for inclusion in September, Tesla was eventually added to the broad market index in December.

Analysts are expecting Tesla's profitability to continue in Q4 FY 2020. Adjusted EPS is forecast to rise 178.8% and revenue is expected to grow 44.5% compared to the same three-month period a year ago. For full-year FY 2020, analysts expect adjusted EPS to rise 6,330.8% as annual revenue expands 28.3%.

As mentioned above, investors are also interested in Tesla's vehicle deliveries. Tesla's main business is making electric cars and it needs to continue expanding production in order to grow revenue and profits. The electric carmaker has made a number of key acquisitions in recent years, including German-based Grohmann Engineering GmbH and Perbix Machine Co. Inc., in order to increase its manufacturing efficiency and capacity. Increasing productive efficiency and capacity is important to justify Tesla's high valuation. And while it may currently lead the electric vehicle market, other automakers are moving aggressively to challenge Tesla's dominance. So far, Tesla has been able to continually expand vehicle deliveries, excluding Q2 FY 2020 when deliveries fell 4.3% amid the pandemic. Vehicle deliveries for Q4 FY 2020, which already have been reported, rose 63.1% year over year (YOY) following a 44.1% YOY rise in Q3 FY 2020. The fourth quarter increase marked the fastest pace of growth since Q2 FY 2019. For full-year FY 2020, Tesla delivered a total of 499,550 vehicles for an annual pace of 35.9%. While that pace of growth would be impressive for most companies, it may be a warning sign for Tesla and its investors. The 2020 growth rate was the slowest for annual vehicle deliveries since FY 2017 and the second-slowest growth in six years.