Tesla (TSLA) -) shares edged lower in early Wednesday trading ahead of the carmaker's third quarter earnings, slated for after the closing bell, which are likely to provide a crucial test to CEO Elon Musk's focus on growth over profits.
Tesla's third quarter deliveries, while the highest on record, missed Wall Street forecasts when they were published in early October, suggesting at least some demand headwinds linked to China's post-Covid sluggishness and looming recession risks in Europe.
China's Passenger Car Association noted last week that Tesla sold just over 74,000 cars in the world's biggest market last month, an 11% slide from last year and down from the 84,159 tally recorded in August.
The slowing sales will test Tesla's 2023 strategy, outlined earlier this year by Musk, of focusing on market-share growth at the expense of profit.
Tesla has been aggressively cutting the price of its flagship Model 3 sedan and Model Y midsize SUV in key markets worldwide including the U.S. and China as part of that aim, in its effort to entice new buyers and fend off increasing competition in the EV space.
"While the macro is clearly not roses and rainbows we believe Tesla's demand story has stabilized at current price levels with a focus on a strong 4Q ahead," said Wedbush analyst Dan Ives, who carries an 'outperform' rating with a $350 price target on Tesla stock.
"The price war in China is a high stakes poker game for Tesla as so far the 'volumes over margins' thesis has worked well to gain market share, although this trend cannot continue at this pace into 2024 with sacrificing margins for volumes," Ives added.
In terms of overall profits, analysts sees Tesla's bottom line falling nearly 30% from last year to 74 cents a share, even as revenue rises by about 12% to around $24.16 billion.
The difference is likely to be reflected in the group's closely tracked automotive margins, a key profit metric, which have been narrowing sharply over the past 12 months following Tesla's price-cut strategy.
The cuts have taken their toll on Tesla's profit margins, which were pegged at 18.7% for the three months ended in June, narrowed from last year's tally of 22.4%.
The lower margins, as well as a muted demand outlook, could compel Musk to expand on his vision to license its full-self driving technologies in a move to boost near-term profits.
Gene Munster, an analyst at Deepwater Asset Management and a long-time Tesla bull, thinks the licensing of FSD technology could generate as much as $20 billion in annual revenue within five years of the first agreement.
Tesla now has data based on around 300 million miles of driving, a figure Musk said will "soon be billions of miles and tens of billions of miles", providing a huge competitive advantage for the company as it ramps-up investments in Ai and other technologies to harness its potential.
Ives of Wedbush also noted that investors are likely to focus on Cybertruck production targets, as well as updates on deliveries, in the call that follows Tesla earnings at 5:30 pm eastern time.
The call will also be the first in four years that does not feature CFO Zach Kirkhorn, who left the group this summer. His role was assumed by Tesla's chief accounting officer, Vaibhav Taneja.
"This is an important conference call for Musk and the Tesla team to communicate the pricing/margin strategy and demand outlook into 4Q and beyond at this crucial time in the EV market share battle globally," he said.
Tesla shares were marked 0.95% lower in early Wednesday trading to change hands at $252.32 each.
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