Consider Buying The Drop In Tesla Stock Post Q3 Earnings

Tesla's stock drops after disappointing Q3 earnings, but temporary factors are impacting its bottom line. However, its dominant position and competitive advantages could lead to higher stock prices in the future.

In the recent Q3 earnings announcement, Tesla, Inc. (NASDAQ:TSLA) experienced a drop in stock price, which was perceived as "disappointing" by investors. Currently trading around $225, the stock has seen a decline of approximately 7% in pre-market trading. During this challenging phase, Tesla's margins have contracted, but it is important to note that this margin compression could be temporary. The slow growth and high-interest rate economic environment have had a negative impact on Tesla's bottom line.

There are several factors contributing to the decline in Tesla's bottom line, including price cuts, inflation, high borrowing costs, and other temporary elements. However, it is expected that Tesla's fundamental position will strengthen as the economic downturn passes and the economy returns to normalized financial conditions. With its dominant market-leading position, economies of scale, and other competitive advantages, Tesla has the potential for accelerated revenue and EPS growth in the coming quarters, which could lead to a significant increase in its stock price in the future.

Currently, Tesla's stock is trading in the $200-300 range and has been consolidating within this range for the past five months. It is expected that the stock will continue to move sideways in the near term. From a technical perspective, the stock is stable and neither oversold nor overbought. However, there are constructive fundamental factors that could drive Tesla's stock higher, potentially surpassing the $300 resistance level in Q1 2024. Investors can continue to generate profits from Tesla's stock through options strategies such as the wheel and covered call dividend (CCD) strategies.

The Tesla CCD plan involves selling covered calls against a Tesla position. By repurchasing the covered calls before earnings and then selling them again at a lower premium, investors can earn a return on their Tesla position, especially during times of volatility. This strategy is suitable for long-term Tesla investors who want to generate income from their stock holdings.

Another effective options strategy that can be implemented with Tesla is the wheel strategy. This strategy involves selling cash-secured put options, specifically the 11/17/23 $220 puts, which can generate a 10% premium. This strategy provides investors with the opportunity to purchase Tesla shares within a specified price range. It is important to note that there is confidence in Tesla's performance in the intermediate and long term, as the stock price is expected to increase significantly.

In the recent Q3 earnings report, Tesla reported a non-GAAP EPS of $0.66, missing the consensus estimate by seven cents. Additionally, Tesla reported revenues of $23.35 billion, which was a 9% year-over-year increase but fell short of the consensus mark by $790 million. The company also reported a Capex of $2.46 billion, representing a 19% rise compared to the same period last year.

The primary reason for Tesla's revenue miss and slightly lower-than-expected profits was attributed to price cuts in the electric vehicle (EV) segment. These price cuts are expected to cost Tesla approximately $2 billion in annual sales. However, it is important to note that these price cuts are temporary in nature. Tesla has the ability to lower prices to capture market share from other car companies and can afford to do so due to its high level of profitability. This advantage allows Tesla to raise prices in the future, and it is expected that the company will increase its advertising efforts to drive sales.

While automotive revenues were $19.625 billion in the last quarter, representing a 5% year-over-year gain, deliveries saw a significant increase of 26% year-over-year, mainly due to the price cuts. Energy generation and storage (EG&S) revenues also experienced a strong growth of 40% year-over-year, indicating solid demand in Tesla's energy space. Services and other revenues surged by 32%. Additionally, Tesla's Cybertruck and Tesla Semi segments are expected to contribute to increased revenues in 2024 and 2025. The Model 3/Y segments, which have been highly successful and profitable, are also expected to drive revenue growth in the future as average selling prices (ASPs) increase.

A deeper analysis reveals that Tesla's automotive sales revenue in Q3 was approximately $18.58 billion. Adjusting for lease accounting, Tesla delivered around 14,706 Model S/X vehicles and approximately 402,311 Model Y/3 cars in the third quarter. Assuming an ASP of $110,000 for the Model S/X segment, the revenue from these models amounts to nearly $1.6 billion. Therefore, the Model 3/Y segment accounted for roughly $17 billion in revenues, suggesting an ASP of around $42,250.

Although this ASP represents a decrease compared to last year's ASP, it is expected that Tesla's ASPs will increase as the economic landscape improves, the Federal Reserve adopts a more accessible monetary stance, and financing options become more affordable. Despite the challenging macroeconomic conditions, Tesla's gross margin was 18% in the last quarter, and its GAAP net income margin was 8%.

While there may be some temporary margin compression, Tesla's margins remain healthy. The margin compression can be attributed to factors such as price cuts, inflation, higher research and development spending, and other transitory elements. As economic conditions normalize, it is expected that margins and profitability will improve in the future.

Tesla has experienced both appreciation and decline in its stock price. While it reached a high of $420, it also saw a significant drop. However, the bear market bottom of around $100 could be seen as a generational buying opportunity. It is unlikely that Tesla's stock will return to those levels again, but a more significant pullback to around the $200 level, representing a 33% decline from its recent high, is possible.

At around $200, Tesla's stock would trade at approximately 28 times next year's EPS estimates, which range from $7 to $8. Despite the temporary slowdown in earnings growth, Tesla has the potential to expand its EPS more efficiently due to its dominant market-leading position, economies of scale, and other competitive advantages in the future.

Tesla faces challenges from increased competition, inflation, margin compression, and a general economic slowdown. These risks, among others, could have a negative impact on Tesla's revenue and EPS growth, potentially leading to lower profitability than expected. It is important for investors to carefully consider these and other risks before making an investment in Tesla.