The Tesla (NASDAQ:TSLA) share price jumped 12% in extended trading on Wednesday (23 October) after the company announced its Q3 earnings. The results were good.
Revenues and deliveries came in lower than anticipated. But earnings per share were higher than expected and that was enough to send the stock soaring.
Low expectations
It’s probably fair to say the market was pessimistic ahead of Tesla’s Q3 earnings report. The stock had fallen 15% in the previous three months and most of the news had been bad.
According to reports, the company had been offering significant discounts and incentives to boost volumes. Worse yet, this didn’t seem to be resulting in a big increase in car sales.
On this front, there weren’t really any surprises. Automotive revenue grew 2% and deliveries were up 6% – neither of which is spectacular for what is uncontroversially a growth stock.
Despite this, there was a familiar source of income for Tesla shareholders. And this caused earnings per share to climb 21% and come in ahead of expectations.
Regulatory credits
Tesla reported $2.17bn in net income for Q3, which was up from $1.85bn during the same period last year. But around a third of 2024’s net income came from selling regulatory credits.
There are a couple of ways of viewing this. One idea is that investors should be concerned that profits from the core parts of the business weren’t actually that impressive.
Another is that Tesla’s found a way to grow its profits in what’s clearly a difficult economic environment. And its ability to do this is a significant competitive advantage over its rivals.
Despite not being a Tesla bull, I’m firmly in the second camp. The most important thing for a cyclical business is how it fares in a downturn and the firm showed some unique strength here.
Outlook
In its update, Tesla pointed to a lot of things for investors to be excited about. These included the launch of its robotaxi network, more affordable cars, and strong Cybertruck sales.
Historically, things haven’t always gone the way that Elon Musk has forecasted, so I’m a little wary of taking this as given. But I think there are definitely reasons for optimism.
The arrival of cheaper vehicles in early 2025 looks realistic to me. I don’t think it’s hard to see how Tesla could use its scale and manufacturing base to produce cars at competitive prices.
I’m less certain about the robotaxi launch though. The event earlier this month failed to impress and there are still regulatory challenges ahead that might prove significant.
Has the opportunity gone?
I thought Tesla’s Q3 earnings report was a real show of strength, so I’m not entirely surprised to see the stock climbing sharply. I don’t think a rising share price means an opportunity has passed though.
The share price is still below where it was at the start of the year and the business has only moved forward in that time. For me though, it’s still a long way above where I’d be comfortable buying it.
