On Wednesday, Tesla (NASDAQ: TSLA) will report its results from the third quarter. After announcing record deliveries from the third quarter, expectations for the financial results of the electric car manufacturer during the period are high. What’s more, the rising share price over the past year has raised Tesla’s stakes in continuing to grow its business rapidly.
Will the carmaker be able to respond to the noise?
Before Wednesday’s earnings report, some investors may be wondering whether or not to buy growth stocks before the update. After all, if Tesla announces better-than-expected earnings and earnings per share, stocks could jump.
To better understand if the shares of the electric car company are attractive today, here is a quick overview of earnings and analysis of the current valuation of the shares.
Earlier this month, Tesla said it delivered a record 139,300 vehicles in the third quarter. It was a huge leap from Q2 – when the carmaker’s main factory was temporarily forced to shut down due to the coronavirus. Vehicle deliveries increased by 53% consecutively in Q3. However, the growth is impressive compared to the quarter a year ago – a period of operations of Tesla were at full capacity. Deliveries jumped 43% year on year.
In 2020, Tesla’s business took advantage of the launch of its new SUV Model Y earlier this year. As the company’s most affordable vehicle to date, management expects sales of the Model Y to eventually compete with sales of the Model 3, Tesla’s best-selling car.
Analysts expect Tesla’s strong sales growth to lead to impressive growth at the top and bottom. On average, analysts expect revenue to grow 31% year-over-year to $ 8.26 billion and earnings per share (not adjusted for GAAP) to jump 51% to $ 0.56.
Tesla shares: Buy, sell or hold?
With Tesla’s business firing on all cylinders, does it buy Tesla shares before gains?
The carmaker’s income statement could indeed send stocks to jump after the report. But stocks can just as easily crater if Tesla misses the mark in an area. It is simply too difficult to predict in which direction the stock will move after the report.
Moreover, investing in stocks should be based on investors’ views on the company’s long-term potential anyway – not based on quarterly results.
Declining beyond the current quarter, investors should note that Tesla’s stock valuation is already rising significantly over the next decade. The company has a market capitalization of over $ 400 billion, although the 12-month revenue reaches only $ 26 billion. The free cash flow or surplus cash flow remaining after regular operations and capital expenditures is only $ 800 million for the same period.
It is likely that the market has already appreciated both the continued leadership in electric cars and the significant gains in market share in the overall global car market. Since so much optimism is already valued in stocks, I would prefer a better entry point of $ 445 per share. Maybe if investors get lucky and the stock falls below $ 400 after the income statement, then the stock may start to look attractive.
For now, however, I would appreciate the “retention” of Tesla shares included in its earnings report on Wednesday. Of course, there is no guarantee that Tesla shares will return to this level. But I don’t mind waiting on the sidelines, hoping for a more reasonable assessment.
Tesla’s third-quarter earnings will be announced after the market closes on October 21.