Crunch-time is fast approaching for both Tesla Inc (NASDAQ:TSLA) and Alibaba Group Holding Ltd (NYSE:BABA). Both of these two companies are set to report earnings for the last quarter today and tomorrow. But going into the print the outlook for these two stocks could not look more different. While Alibaba is due to report a very strong quarter, boosted by a positive Chinese retail spending environment, Tesla’s well-documented production constraints are likely to result in a very weak quarter. The most interesting question here is whether this will do much to deflect the Tesla’s biggest supporters- and whether the longer-term picture can recover from its current softness.
Let’s take a closer look now:
Controversial auto stock Tesla is out with its results after the close of trading on 1 November. The stock has soared by over 50% so far this year- making it one of the market’s best performers. But even the stock’s most bullish supporters accept that Tesla is likely to report weak results for the third quarter. In this bearish environment, shares have slipped back to trade at $320 down from a high of $389 in September. The crucial question is whether this even matters. Five-star Instinet analyst Romit Shah says that yes, “investors are anticipating a weak 3Q report” that may well miss consensus estimates. But nonetheless he concludes: “we remain positive on Tesla’s shares, believing that deliveries, margins, and cash flow will bottom in Q3 and inflect higher over the next several periods.” (To watch Shah’s track record, click here)
Shah notes that shares have slipped about 10% due to supply constraints of Tesla’s much hyped Model 3 vehicle, ranging from problems with the workforce to issues with autonomous capabilities. Shah says: “3Q Model 3 deliveries missed expectations by over 80% (220 versus 1,500). We also see risk to our 4Q vehicle delivery estimates (12k Model 3’s).” Previously, CEO Elon Musk had claimed that Q3 production of the Model 3 would be roughly 5,000 units per week by the end of December. There is now a possibility that Tesla- which is still a loss-making business- will need to raise funds sooner than previously expected. It is not so long ago (August) that Tesla raised $1.8 billion at a yield of 5.3% through a debt offering back, $300 million more than the market had been expecting.
Tesla has already moved to address market concerns saying: “we understand what needs to be fixed and we are confident of addressing manufacturing bottleneck issues in the near-term.” However worrying claims have persisted, including reports that parts of the Model 3 are being manufactured by hand. As a result, reassurance and clarification on the Model 3 production outlook looks set to be a major topic on the post-earnings conference call.
Specifically, Tesla is likely to address questions on timing on profitability, autonomy, whether the Model 3 ramp up is realistic, and if there is any cannibalization of Model 3 demand from Tesla’s earlier Model X vehicle. Analysts will also be looking out for any updates about the demand seen so far for the vehicle. In the last report, Musk revealed that so far the company has taken a total of 455,000 reservations for the vehicle. Musk wants this figure to increase exponentially to annual demand for 700,000 vehicles.
Like Romit Shah from Instinet, venture capital firm Loup Ventures is ultimately still bullish on Tesla’s longer-term outlook. The fund says “While we believe Model 3 production will largely be a guessing game over the next few quarters, and will produce future disappointments, it’s important to note by now we believe Tesla has close to 475-500k net reservations for the Model 3, and we remain confident that Model 3’s value will stoke demand for the next several years.” The fund even goes so far as to conclude with the very optimistic claim that “the TSLA story has the most upside in large cap tech over the next 5 years.”
Overall, Tesla has a Hold analyst consensus rating. We can see how divided analysts are on the stock as reflected by the 5 buy, 8 hold and 9 sell ratings published on the stock in the last three months. Meanwhile the average analyst price target of $304.47 suggests a downside of nearly -5% from the current share price.
Alibaba Group Holding Ltd
Chinese e-commerce king Alibaba has exploded by 108% so far this year. Now BABA is set to report its earnings results for the quarter before market open on Thursday. And the picture is looking very positive going into the print, suggesting shares can move even higher. Take, for example, the fact that Barclays analyst Gregory Zhao has just upped his BABA price target from $200 to a bullish $220. His price target now predicts upside potential of close to 17% for this fast-growing stock. According to Zhao, Alibaba is looking at third quarter revenue growth of 54% year-over-year to $7.97 billion, slightly above consensus. Specifically, he is anticipating a 105% increase in international retail from the same period last year, coupled with a 94% leap in BABA’s burgeoning cloud business.
And this outlook is mirrored by top SunTrust Robinson analyst Youssef Squali. Ahead of the crunch date, he has reiterated his buy rating on BABA with a $205 price target up from $200 previously. Squali explains why BABA is still one of the market’s top stocks, saying “We remain positive on BABA considering its leadership position and outsized growth and margins in China’s ecommerce market, its diversified portfolio of digital assets and current valuation.” Most notably, he refers to “strength” in the company’s core Retail segment and a very encouraging retail environment in China. Through a bit of fact checking with China’s National Bureau of Statistics, he has discovered that online retail sales spiraled up 35.6% in the third quarter. And given BABA’s dominant e-commerce position in China this is very good news. Overall, for the quarter, Squali is predicting $7,705 million in revenue, (a 50% year-over-year rise), $1.11 in adjusted EPS, and $3,635 million in EBITDA.
Meanwhile for those investors who plan to closely follow earnings, Stifel Nicolaus analyst Scott Devitt highlights key points to listen out for. These include (1) Alibaba’s integration of Cainiao / investments in logistics; (2) promotional activity ahead of Singles’ Day ; (3) updates on cloud; (4) investments in the digital media business and reports of a new online gaming business group; and (5) details on Alibaba’s plan to ramp R&D spending to $15 billion over the next three years. Interestingly, Devitt’s BABA price target only suggests upside of 0.82% from the current share price.
His price target comes in well below the average price target of $202.25, which translates into over 9% upside potential from the current share price. Finally, for any BABA doubters out there (which seems unlikely) you may want to note that Alibaba has one of the best stock ‘Strong Buy’ ratings from the Street. Indeed, in the last three months, the stock has received an impressive 18 back-to-back buy ratings. In fact, the last time this stock received a hold rating was six months ago.