Tesla (TSLA), the automotive company, isn’t much of a market mover, and even on the street it attracts niche investors more than it earns serious coverage from most analysts. Still, it is a volatile and speculative equity, meaning it offers earning opportunities.
Bulls on the stock saw a buying opportunity just before Valentine’s Day, after the New York Times (NYT) published a scathing review of the car, claiming it failed to reach Boston without losing a charge. The details of the trip were scrutinized by car enthusiasts, environmental activists, and investors in the company. The Times review hit the stock, which fell around 3% on the 11th after the review was published, but almost fully recovered within a week to its previous $39.30 level. This means a quick 3% short-term gain was easily won by swing traders who saw the controversy as a storm in a teapot.
The question investors faced before yesterday (Wednesday, February 20, 2013) was whether to hold or sell for the earnings call, which would offer a much more substantial swing either way. On the surface, the news was good: the company expects its first profit in the first quarter of 2013 after a 500% quarter-over-quarter jump in revenues to $306 million, and the company’s gross margin rose to about 8%–the first positive operating margin in the company’s history. The company said this was driven by faster production of the company’s Model S.
This wasn’t enough good news to offset the bad. Costs were higher than expected, which Tesla blamed on vendors. The establishment of a new factory and the development of a new vehicle model were also pointed to prompting the company to promise it will reduce costs in the future, particularly the cost of producing the Model S. This, the company says, will help the company earn a profit next quarter.
Bulls were disappointed at a softer but much more important metric which cannot be hidden in creative accounting: car deliveries were down by 25%, with the company failing to achieve 20,000 car reservations by the end of 2012, partly because 1,500 orders were cancelled in the fourth quarter, representing 10% of reservations for the year. That might suggest a slowdown in demand or–even worse yet–disengagement with the brand.
While smart analysts can find ways of anticipating this, most of the market was taken by surprise and the stock fell by around 10% after the earnings call. The full transcript should be combed over closely, because it contains clues that the company may be losing its customer base. Now investors need to consider why and whether a comeback is in order, and how to price that eventuality into the stock. For now, the bullish buying opportunity that the Times review represented has clearly failed to pan out, and short-term swing traders won out over those investing in the company full time. Next earnings call, a posted profit would prove victory for the company–but before that can happen, expense issues need to be clarified and demand needs to come back.