Tesla, Inc. Earnings: What to Watch

By Daniel Sparks Markets Fool.com

Ahead of Tesla's (NASDAQ: TSLA) fourth-quarter earnings release next week, the pressure is on. Tesla stock is up more than 50% in the past three months as investors begin to give more weight to Tesla's highly anticipated Model 3, which is slated to launch later this year. Will Tesla's fourth-quarter results and management's outlook for the year live up to high expectations?

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Ahead of Tesla's fourth-quarter update, here's some background on three key areas to watch.

Image source: author.

But first, here's a brief look at what we already know about the quarter: Tesla delivered 22,200 vehicles -- about 3,000 units short of its guidance. These deliveries are up about 27% from the year-ago quarter. Management said the miss was due to "short-term production challenges starting at the end of October and lasting through early December from the transition to new Autopilot hardware."

Profitability

While Tesla CEO Elon Musk did say in the company's third-quarter earnings call that there was a chance for Tesla to achieve profitability in Q4 when excluding non-cash stock-based expenses, and a smaller chance for it to be profitable when including non-cash stock-based expenses, investors shouldn't count on this forecast given Tesla's already-reported worse-than-expected deliveries. Indeed, this is probably why analysts, on average, are expecting Tesla to report a loss of $0.35 per share.

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But little hope for profitability doesn't mean investors should ignore profitability metrics altogether. One area that investors should look at is Tesla's operating cash flow. While Tesla's costly production ramp-up of its newer Model X, as well as its worse-than-expected deliveries, could weigh on the metric, investors should still look to see if operating cash flow is improving on a year-over-year basis. After all, Tesla is going to need cash flow to help fund its rapid expansion ahead of Model 3. In Tesla's fourth quarter of 2015, Tesla reported operating cash outflows of $29 million.

Model 3

Tesla's planned lower-cost, higher-volume Model 3 will likely take center stage in the company's update. Though the vehicle isn't due to begin deliveries until sometime in the second half of the year, its development and planned timeline for launch are critical to Tesla stock. Management expects the vehicle will help take the company from producing about 100,000 cars annually today to 500,000 annually in 2018.

As of management's latest update on Model 3, Tesla completed Model 3 production line layouts and was preparing to install new body welding and final assembly lines for the vehicle. Investors should look for management to ensure investors the important vehicle is still on schedule.

Guidance

Perhaps the biggest wildcard going into Tesla's fourth-quarter report is what its full-year guidance for vehicle deliveries will look like. While the automaker has increased vehicle sales at a rate of about 50% annually in recent years, it's unclear how much of its expected growth in its production rate -- from 100,000-unit annualized production today to its targeted 500,000-unit annualized run-rate in 2018 -- it anticipates occurring in 2017.

Tesla factory in Fremont, CA. Image source: author.

But given the s-curve pattern of auto manufacturing production ramps, it's likely that Model 3 production will initially be slow and won't start ramping up steeply until the end of 2017. With this in mind, investors should look for guidance of about 50% year-over-year growth or better in vehicle deliveries -- in line with Tesla's historical growth. In other words, investors should look for guidance for total 2017 deliveries to be somewhere in the range of 110,000 and 130,000 units.

Tesla announces its fourth-quarter results after market close on Wednesday, Feb. 22. Investors will be able to find the earnings release at the company's investor relations page. Stay tuned at The Motley Fool for a Foolish take on the quarter after the results go live.

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Daniel Sparks owns shares of Tesla. The Motley Fool owns shares of and recommends Tesla. The Motley Fool has a disclosure policy.