Tesla is breaking the market, but there's a good shot that it's a risk to margins

Tesla is breaking the market, but there's a good shot that it's a risk to margins

Post delivery, we pointed out that we thought there was a risk for earnings for Tesla TSLA on April 4th.

There's a good shot that the average price drop can surprise the Street to the downside, and a drop in costs may not be enough to save margins. The earnings report was certainly the main story last night.

As soon astelsa printed its earnings, I posted some of the chat posts to subscribers as soon as Telesa printed its earnings. A key part of what I do is react quickly to earnings on stocks we follow especially when the news prints on the tape.

In fact Tesla did soon break that key level 176 I pointed out and then did go into free fall.

I don't think Tesla is doing a poor job of lowering the price of gas.

Breaking 175 is a short-term technical risk for lower. This quarter was not a good one. When I looked at prices, I expected it to be a risk to margins. Auto gross margins account for 90% of the overall profit, making it the main metric. My boss, Mr. Smith, provided me with a simple concept to understand the major factors that drive a company's revenue and profits. 90 percent of a company's profits slowing is a problem. There's no way to look at it, he said.

The energy business had strong earnings and the company said on the call that they expect higher margins, but this quarter margins dropped a touch and this business, so far is not the auto business. Margins were a tiny fraction of the total number of cars on the market.

I look at things in the tradable discountable timeframe of 9 - 12 months. I believe valuations are most affected by that time period, which means the next 12 months' earnings are, to me, the main driver of stock prices. That's helped us become big bulls on the way up for TSLA and stepping aside near the peak a year-plus ago.

In past notes, I said our EPS has now been below the Street and after this call with auto margins decreasing big, our EPS drop further more meaningfully below the Street.

Musk expects full autonomy on this call this year, but until we see it, I can't model the benefits. When we see it, I'll be happy to model it benefitting that tradable discountable market pricing model window.

In the meantime, Musk said that price cuts were driven by demand rather than cost driven, which was a change from their analyst day. I did point out that analyst day there appeared to me a need to drop costs. Musk's dislike of the Fed and the rates means that if they didn't cut prices orders, they probably could have been LESS than production.

Musk said he can sell cars for zero profits with self-driving autonomy on-the-come does not help his valuation case given autonomy's been pushed out many times.

For anybody who's been in the business for a while and has followed more than just TSLA, they know that these are not good things to hear and feed into earnings models and so valuations, negatively.

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