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Is it time to sell Tesla stock after disappointing Q3 report?

Is it time to sell Tesla stock after disappointing Q3 report?

In the wake of Tesla‘s (NASDAQ: TSLA) underwhelming Q3 report, shares of the electric vehicle giant are poised to open lower on Thursday, October 19. 

The report revealed a significant dip in profit margins and delivered a profitability outlook for the highly anticipated Cybertruck that fell short of expectations. 

As a result, the stock is already down nearly 5% in premarket trading, underscoring the swift exodus of investors in response to the disappointing results. 

TSLA down in premarket. Source: Nasdaq

While this initial reaction is natural, investors now face a broader question: should they maintain their faith in the world’s largest auto company, or is it time to reconsider their positions?

The bear case for Tesla stock

The first ‘red flag’ at Tesla that many investors and analysts are currently debating is the electric vehicle (EV) maker’s weakened fundamentals. 

In its Q3 report, the company reported adjusted earnings per share (EPS) of 66 cents, missing the consensus estimates of 73 cents. The non-adjusted net income for the quarter stood at $1.85 billion, while the total profit plummeted roughly 22% year-over-year. 

Revenue came in at $23.35 billion, while the analysts were projecting $24.1 billion. This was the first time Tesla missed both EPS and revenue estimates since Q2 2019. 

Tesla quarterly revenues by segment. Source: CNBC

Another vital profitability metric, operating margin, stood at 7.6%, significantly down from the 17.2% reported in the same quarter last year. 

The sharp drop in profits can be largely attributed to Tesla’s significant price-cutting campaign this year. The carmaker reduced the prices of its US and China-made cars several times this year, sacrificing profitability in favor of making more vehicles, hoping their value will surge drastically once Tesla fully releases its autonomous driving solution.

Musk pessimistic about economy, delivers downbeat Cybertruck profitability outlook

In addition to poor Q3 results, Tesla and its boss Elon Musk were not any more optimistic about the near-term outlook either. 

Notably, the billionaire co-founder expressed his concerns about the current macroeconomic environment marked by high-interest rates, which is making driving demand increasingly difficult. 

“I’m worried about the high-interest rate environment we’re in,” Musk said.

“If interest rates remain high or if they go even higher, it’s that much harder for people to buy the car.”

– he added.

Because of this, the 52-year-old said Cybertruck would not post significant positive cashflow for 12 to 18 months after its production begins, emphasizing the company currently remains focused on making its vehicles more affordable for buyers. 

“I just can’t emphasize enough how important cost is…We have to make our products more affordable so people can buy it.” 

Bull case for Tesla

Headwinds related to profitability and the near-term outlook are real, which is why there will undoubtedly be those who find Tesla’s stock less appealing. 

But when it comes to investing, much of it comes to investors’ perspective and their goals.

That said, many do not see Tesla as a sole carmaking company, but rather a tech giant focused on innovation and capable of revolutionizing the automotive industry.

Analysts at CG Capital Markets acknowledged that Tesla’s Q3 results were “less favorable.” However, the automaker’s upcoming vehicle launches, the Full Self-Driving (FSD) system, and its heightened focus on artificial intelligence (AI) did not change its long-term appeal, strategists said. 

Consequently, those who are focused on Tesla’s long-term prospects and do not worry too much about challenges in the short run, are likely to keep their faith in the EV giant and see the shrinking profits as a temporary blip. 

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Disclaimer: The content on this site should not be considered investment advice. Investing is speculative. When investing, your capital is at risk.

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