There are only 2 things you need to know about Tesla's upcoming earnings
- Tesla posted a strong 2018 Q3 - the fourth quarter should also be profitable, but weaker than the previous financial period.
- It will be interesting to see if quarterly revenue continues its significant improvement - the Tesla topline was nearly $7 billion in Q3.
- The more complicated questions for Tesla are around how it will satisfy its capital needs in 2019.
Tesla reports fourth-quarter and full-year 2018 earnings on Wednesday after the bell.
After posting a blowout third quarter, with nearly $7 billion in revenue and a much fatter than expected profit, Tesla should pull back in Q4.
But I've already over-complicated matters. There are essentially two things you know before the company reveals the numbers and CEO Elon Musk talks to Wall Street analysts and attempts to better disguise his barely disguised (and perhaps justified) contempt:
- Tesla will post a quarterly profit.
- It will not be as big a profit as in Q4.
That's it! That's all you need to know! Nothing more to see here!
Yes, if Tesla can manage a Q4 profit - something in the ballpark of $1 per share, versus almost $3 per share in Q3 '18 - it will be the company's first-ever sequential positive bottom line result. Given that losses for the first half of 2018 were massive, a full-year profit would be next to impossible.
Read more: Elon Musk was right - Wall Street's take on Tesla is boneheaded and boring
I'll be more focused on revenue, which took big jump in Q3 2018 thanks to greatly increased deliveries of Tesla's Model 3 sedan. If Tesla can cross the $7-billion barrier, given its sales goals for 2019, it's not out of the question for a $10-billion quarter to materialize before the end of the year.
Playing defense with a 'keep it simple' analysis
My "keep it simple" analysis here is, to be perfectly honest, something of a defensive maneuver. Tesla has already telegraphed some pressure on profits in 2019, and shares are already pricing in weaker results on the bottom line. they fell below $300 a few weeks ago when Musk raised profits warnings and the company announced layoffs. For January, the stock slide more than 12%.
That would mean potential trouble for a tranche of Tesla convertible bonds - $920 million worth - that's coming due March 1. The conversion price is about $360, and Tesla has reportedly said it will satisfy bondholders with a mix of cash and equity. Obviously, more cash could be in the picture if Q1 earnings don't send the stock closer to that $360 mark.
Soooo ... there will surely be some discussion of whether Tesla intends to raise capital in 2019, either through equity or by issuing new debt. Then the question will turn to Tesla's balance sheet, where the company had $3 billion in cash at the close of Q3 2018 (that's three times what Tesla has historically tended to finish a year with, by the way).
This is where matters actually get complicated.
Yes, Tesla can sell new shares. At sub-$300 prices, investors will certainly want to buy them. I don't know why the company hasn't done this already.
And yes, Tesla can issue new debt. It's 2017 junk-bond sale was accomplished on more favorable terms than most high-yield borrowers could dream of - and brought in $1.8 billion. I'm not sure why the company hasn't done this, as well. Car companies have insatiable appetites for capital and issue debt all the time. It becomes a problem only if sales absolutely tank.
Finally, Tesla can always put out some auto-lease-backed securities, as it has in the past, and take in additional deposits for new vehicles, such as the Model Y compact SUV that's likely to be unveiled this spring.
Getting enough money to run the business is a problem, but it's a good problem. For Tesla, the alternative is having a failing business that isn't worth running. That's a bad problem, but not one Musk & Co. are contending with.
As you can see, once we pass over what should be an encouraging if less spectacular Q4 earnings reports, we can move on to the more substantive challenges of executing in 2019. Tesla didn't do such a great job on that in 2018. The coming year needs to be better.