Wednesday, You’re here (NASDAQ: TSLA) will release its third quarter results. After announcing record third quarter deliveries, expectations for the financial performance of the electric car maker over the period are high. More so, the soaring share price over the past year has raised the stakes for Tesla to continue to grow its business rapidly.
Will the automaker be able to live up to the hype?
Ahead of Wednesday’s earnings report, some investors may be wondering whether or not they should buy shares of the growth stock ahead of the update. After all, if Tesla reports better-than-expected earnings and earnings per share, the stock could jump.
To better understand whether the electric car company’s shares are attractive today, here’s a quick look at earnings and an analysis of the stock’s current valuation.
Earlier this month, Tesla said it delivered a record 139,300 vehicles in its third quarter. This was a huge jump from the second quarter – when the automaker’s main vehicle plant was temporarily forced to shut down due to the coronavirus. Vehicle deliveries jumped 53% sequentially in the third quarter. However, growth was also impressive compared to the quarter of last year – a period in which Tesla’s operations were at full capacity. Shipments climbed 43% year on year.
In 2020, Tesla’s business benefits from the launch of its new Model Y SUV earlier this year. As the company’s most affordable vehicle to date, management expects sales of the Model Y to eventually rival sales of the Model 3 – Tesla’s best-selling vehicle.
Analysts expect Tesla’s strong sales growth to lead to impressive revenue and earnings growth as well. On average, analysts expect revenue to grow 31% year-over-year to $ 8.26 billion and non-GAAP (adjusted) earnings per share to climb 51% to 0 , $ 56.
Tesla share: buy, sell or hold?
With Tesla’s business pulling all cylinders, is Tesla stock a buy before profit?
The automaker’s earnings report could, indeed, push the stock higher following the report. But stocks could just as easily crumble if Tesla misses the mark in an area. It’s just too hard to predict which way the headline will move as a result of the report.
Additionally, an investment in the stock should be based on investors’ view of the long-term potential of the business anyway – not a single quarter’s results.
Zooming out beyond the current quarter, investors should note that Tesla’s stock valuation is already characterized by massive growth over the next decade. The company has a market capitalization of over $ 400 billion, despite having a 12-month revenue of just $ 26 billion. Free cash flow, or excess cash flow left after taking over regular operations and capital expenditures, was only $ 800 million in that same time period.
The market has arguably already factored in both continued leadership in electric cars and significant market share gains in the global automotive market as a whole. Because so much optimism is already included in the share price, I would prefer a better entry point than $ 445 per share. Maybe if investors are lucky and the stock drops below $ 400 after the earnings report, the stock might start looking attractive.
For now, however, I would characterize Tesla’s action as a “restraint” in its earnings report on Wednesday. Of course, there is no guarantee that Tesla stock will fall back at this level again. But I don’t mind waiting on the sidelines, hoping for a more reasonable valuation.
Tesla’s third quarter results will be released after market close on October 21.
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