Forget about all the hoopla over Tesla (TSLA) founder Elon Musk’s bid to buy Twitter (TWTR). (If you can.)
On Wednesday, when the electric car leader announces first quarter 2022 earnings the story will be China, China, China.
China’s strict Pandemic lockdown has forced Tesla to suspend production at its Shanghai plant for almost three weeks. At a run rate of about 2,100 cars a day, that’s around 39,900 units lost since the lines stopped on March 28.
That same Pandemic shutdown has caused China’s economy to slow with car sales taking a particularly big hit. Sales in the world’s biggest car market tumbled 11.7% in March from a year earlier to 2.23 million vehicles. That’s down from a 18.7% jump in February, according to the China Association of Automobile Manufacturers.
So lots of bad news will pummel the stock, right? (Tesla shares do trade at 202 times trailing 12-month earnings per share and that should make them very vulnerable to any disappointment.)
Well, maybe.
While China’s overall March auto sales plummeted, sales of new energy vehicles, which include battery-powered electric vehicles, plug-in petrol-electric hybrids and hydrogen fuel-cell vehicles, more than doubled in March to 484,000 vehicles.
Great news? Again, maybe. Sales of new energy vehicles tripled in February. So will the drop in March to a mere double be seen as a plus or a minus?
Same uncertainty on the Shanghai production news front. Tesla has just announced that it will resume production at its Shanghai plant using what’s called a “closed-loop system” where workers live in the factory–sleeping, eating, showering, etc. in the plant rather than going home–in an effort to avoid Pandemic restrictions on movement that have essentially locked residents, including workers, into their apartments. The timing of the news seems a little too perfect to me–news just before earnings that addresses a likely big worry on Wall Street–and experiments at other automakers in China of closed-loop production haven’t been especially successful. Volkswagen, for example, has found that workers locked into factories still can’t produce many cars if parts don’t arrive from suppliers because of the Shanghai shutdown.
So good news or bad news on the production front? I think it will depend on how deeply Tesla analysts want to dig and whether or not they’re wearing their cynics hats.
Wall Street has forecast that Tesla earnings will climb to $1.64 share in the first quarter of 2022 from 39 cents a share in the first quarter of 2021. In the last month none of the analysts who follow the stock have cut their estimates and one has raised the forecast.
The range in estimates is rather wide with a high forecast of $1.95 a share and a low of $1.06.
Tesla also has a history of big surprises with a 22% surprise in the fourth quarter of 2021, 50% in the third quarter, and 96% in the second quarter.
So there’s certainly a lot of potential for volatility here.
My own opinion is that the volatility will get resolved to the upside–if the company comes out near forecasts–as investors and traders breathe a sigh of relief and look to pick up shares on the 6.83% drop last week.(Tesla is down 6.79% for 2022 to date as of Friday,April 15.)
I own Tesla in my Volatility Portfolio on my subscription JubakAM.com site. I bought the shares looking for an upside pop and I’m going into Wednesday’s earnings with that expectation. (And a recognition of how volatile this stock is likely to be and the risk that this volatility gets resolved to the downside.)
