Key Takeaways

  • Adjusted EPS was $1.14 vs. the -$0.07 analysts expected
  • Vehicle deliveries fell YOY, but by less than expected.
  • Tesla posted positive GAAP earnings, clearing the final hurdle to be considered for inclusion in the S&P 500.

What Happened

Tesla reported GAAP earnings for the fourth consecutive quarter on July 22, 2020 when it announced its Q2 2020 results. This means that it met the final requirement left to be considered for inclusion in the S&P 500. Remember, however, that this does not mean it will be automatically included right away. Considering how large a company Tesla is, with a market cap closing in on $300 billion, its inclusion in the cap-weighted S&P 500 would require a significant re-adjustment of the index's weightings. That, in turn, would adjust the weightings of a lot of index ETFs and mutual funds. This means that figuring out when to include Tesla in the index's periodic rebalancing is going to be tricky for the Index Committee, which determines which stocks are included in the index. Due to the difficulty and amount of rebalancing involved, Tesla's inclusion may not happen for a while as the committee tries to figure out the implications of such a massive addition.

In more mundane news, Tesla's adjusted EPS and revenue both exceeded analysts' expectations, as the number of vehicles delivered, announced earlier in the quarter, fell by less than analysts expected. Tesla's stock is up in aftermarket trading.

(Below is Investopedia's original earnings preview, published July 21, 2020)

What to Look For

Tesla Inc. (TSLA)'s stock has skyrocketed by nearly four-fold this year, boosting its market value to more than $300 billion. That has made Tesla, the electric automaker led by CEO Elon Musk, eight times bigger than U.S. rival General Motors Co. (GM) and 70% bigger than Toyota Motor Corp. (TM), making Tesla the world's most valuable automaker. That strong performance has been aided by a string of three consecutive quarters of profits.

Investors will be watching to see if Tesla can extend its profit streak to four straight quarters, and maintain its lofty market value, when it reports earnings on July 22, 2020 for Q2 FY 2020. Analysts are skeptical. They currently estimate that Tesla will lose money in Q2, as measured by adjusted earnings per share (EPS), as revenue declines.

In this quarter, investors will be closely watching for more details on two key metrics at Tesla. The first is vehicle deliveries, Tesla's most closely watched metric and a key gauge of success, Tesla already reported earlier this month that vehicle deliveries for Q2 FY 2020 fell year over year (YOY) as the coronavirus pandemic hurt production and sales.

The second key metric is GAAP earnings, which Tesla has yet to report. The recent explosion in Tesla's stock price is partly explained by expectations that the stock may be added to the S&P 500 Index. To be eligible for inclusion, Tesla must report its fourth straight quarter of GAAP profits, not adjusted earnings, in Q2 FY 2020. Tesla has reported GAAP profits for three straight quarters, but analysts estimate the company will post a GAAP loss in Q2.

Tesla's shares reflect investors' exuberance about the stock. They have provided a total return of 542.6% over the last 12 months, more than 60 times greater than the S&P 500's total return of 8.9%. All figures are as of July 20, 2020.

One Year Total Return for S&P 500 and Tesla
Source: TradingView.

Tesla's earning performance has been highly erratic over much of the past three years. It initially posted a long string of quarterly losses through 2017 to the end of the first half of 2018. But since then, it's posted more quarterly profits than losses.

After crashing with the rest of the market earlier this year on fears over the global pandemic, Tesla's shares rebounded sharply. But despite reporting Q1 FY 2020 adjusted earnings at the end of April that dramatically beat analysts' forecasts, the stock moved mostly sideways for the next month. Analysts had been expecting a loss, but Tesla reported that adjusted EPS grew 140.0% compared to Q1 FY 2019. Revenue also grew markedly, up 31.8%.

Tesla also beat adjusted earnings estimates during the final quarter of 2019. Adjusted EPS grew 7.1% YOY, a considerable improvement from the loss reported in the prior quarter. But earnings grew much slower than they had during each quarter from Q3 2018 to Q2 2019. Revenue grew a scant 2.2%, and aside from the decline posted in Q3 FY 2019, it marked the slowest growth Tesla has reported in at least 12 quarters. The company's shares rose over the following week, but the gains were quickly wiped out by the coronavirus-induced market crash that began in late February.

Since bottoming out around the middle of March, Tesla's shares have sped ahead of the market. Analysts expect an adjusted loss per share of -$0.07 and a revenue decline of 13.4% for Q2 FY 2020. While still two quarters away, analysts nonetheless expect Tesla to report its first-ever annual profit for all of FY 2020.

  Q2 2020 (FY) Q2 2019 (FY) Q2 2018 (FY)
Adjusted Earnings Per Share ($) -0.07 (estimate) -1.12 -3.06
Revenue ($B) 5.5 (estimate) 6.3 4.0
Vehicles Delivered 90,650 (actual) 95,200 40,740

Source: Visible Alpha; Tesla Inc.

As mentioned, one of Tesla's key metrics is vehicle deliveries, which represent the most concrete measure of whether Tesla is able to grow revenue. Both deliveries and production, reported earlier, beat analysts' expectations for Q2 FY 2020. Since Tesla has faced recurring struggles with profitability, vehicle deliveries remain an important driver of its stock price. While demand for Tesla cars has generally remained strong despite past production bottlenecks, factory closures caused by the pandemic have contributed to declining deliveries and vehicle production. For Q2 FY 2020, the number of vehicles delivered fell 4.8% compared to the same quarter a year ago. The number of vehicles produced fell 5.5%. 

The strong Q2 FY 2020 deliveries are fueling expectations from some investors that Tesla could also beat another key metric - GAAP earnings estimates - and meet the eligibility criteria for inclusion in the S&P 500. The stock already meets the market-valuation and liquidity requirements to be eligible for inclusion. But as mentioned above, Tesla also needs to report positive GAAP earnings for Q2 FY 2020, which would be the fourth consecutive quarter of profitability. Tesla's adjusted EPS, expected to be -$0.07, could easily be beaten in the Q2 report. But in order to meet the eligibility criteria, Tesla must report positive earnings on a GAAP basis. Right now, analysts estimate a GAAP loss amounting to -$0.72 per share for the quarter, 10 times bigger than the adjusted loss per share. The stakes are high for Tesla and its investors. Tesla's acceptance into the broad market index could push the stock higher as passive index funds that track the S&P 500 would be required to load up on the new entrant's shares.