Tesla’s Earnings Review: Does the Juice Justify the Squeeze?

Key Points

• Despite sky-high expectations, Tesla’s Q3 report fell short on several key points. 
• The stock dropped in after-hours and was still down in Thursday’s pre-market session.
• The risk now is clearly to the downside, at least in the near term. 

Tesla Inc. NASDAQ: TSLA went into Wednesday’s earnings report with sky-high expectations. The stock was primed for a big move either way after doubling in value since April and trading in a tight range between $425 and $445 in recent weeks. Investors were waiting to see whether the company’s fundamentals could justify that 255 price-to-earnings (P/E) ratio we’d been talking about recently, or if cracks were finally starting to show.

As we’ll see below, they got their answer quickly. Shares slid in after-hours trading and were still under pressure in Thursday’s pre-market session as investors digested the third earnings miss of the year.

It leaves one big question hanging over the stock heading into the rest of Q4: Is this the start of a major correction, or are there reasons to still be bullish once the dust settles?

The Earnings Miss That Shook Confidence

For starters, let’s look at the numbers. Tesla reported third-quarter revenue of $28.09 billion, up nearly 12% on the year and slightly ahead of analysts' expectations. However, earnings per share came in light at 50 cents, compared to the 56 cents that analysts were expecting. 

Although operating margin improved from the previous quarter, it remained down year-over-year. In short, the numbers confirmed what many had feared heading into the report: the company’s growth engine is continuing to stall, just as competition is ramping up.

Price cuts, higher costs, and slowing deliveries all contributed to the squeeze. While CEO Elon Musk talked a big game around expanding the company’s robotaxi program in the months ahead, it did little to distract from the reality that Tesla shares are actually looking a little naked right now.

This will be a tough pill for investors to swallow, as there had been signs that the worst might be over and that it had turned a corner. However, they were instead left with the feeling that Musk’s focus on the likes of Tesla’s Optimus humanoid robot, which he said could actually perform surgery someday, was more distraction than direction.

Bulls Still Have Their Talking Points

That being said, some bright spots in the report could prevent long-term bulls from abandoning ship. Tesla’s revenue is back in growth mode, the company remains profitable, and it still holds a dominant market share in the EV space. This latter point will have been strengthened by the decent delivery numbers last quarter, which came in ahead of the consensus. 

There’s also the fact that many analysts have been maintaining their bullish stances throughout the past month, and even this week. On Tuesday, for example, Wedbush made a point to reiterate their Outperform rating on the stock, along with their $600 price target. 

It will be worth watching what fresh analyst updates emerge in the coming days, but expect several of Tesla’s long-term bulls to hold their ground. Their argument is simple: even with slowing growth and a juicy valuation, Tesla remains the dominant EV stock and one of the few companies in the space with the vision to continue innovating at scale for a long time.  

The Risks Are Mounting

The problem is that Tesla’s valuation leaves no room for error, and there were plenty of holes in Wednesday’s report. At 255x earnings, the stock is still priced for perfection, and this was anything but a perfect report. 

That’s where the bear case gathers strength, and they’ll argue that Tesla is now facing the worst of both worlds: tightening profitability and intensifying competition. Technically, the setup has also weakened. Shares haven’t set a fresh high since the first day of October, and are due to open Thursday’s session near the bottom of their recent range. If they can’t stay above $410 into the weekend, things could get spicy. 

The Smarter Move Might Be to Step Back

For investors who still believe in Tesla’s long-term story, it may be wise to step back and let the next few sessions unfold. The broader market has been turning softer, with many large-cap tech names pulling back after months of gains. Against that backdrop, a substandard report like this leans more towards empowering the bears than the bulls. 

Yes, Tesla remains one of its generation's most innovative and transformative companies. But great stories don’t always make for great trades, especially when expectations are this high and the results lackluster.