Should You Buy Tesla Stock Before Oct. 23?

Another quarter, another highly anticipated earnings report from Tesla (TSLA -0.09%).

The company will be giving an update on its financial statements to shareholders on Oct. 23, covering the three months ending in September. Investors will be watching how revenue, profit margin, and cash flow have changed and what it means for Tesla's business health.

After the hyped-up "We, Robot" event earlier this month fell flat and tanked the stock, investors are looking for Tesla to produce a win with this latest earnings release. The stock is off 46% from all-time high set in 2021, with revenue growth slowing down for the electric vehicle (EV) and renewable energy giant. Perhaps this is a buying opportunity for those focused on the long term.

Should investors buy Tesla stock before its earnings report on Oct. 23?

Slowing deliveries growth, shrinking profits

In the last few quarters, Tesla has seen slowing growth in deliveries for its EV product lines. Deliveries were 463,000 in the third quarter, up from 435,000 in the year-ago quarter but off from an all-time high quarterly figure of 485,000 reported in December last year. The company has struggled to grow after reaching such a large scale due to how expensive its vehicles are. It also doesn't help that its only new model released in the last few years -- the Cybertruck -- is an expensive niche product.

In order to move metal, Tesla has greatly reduced the average selling price of its vehicles. You can see this directly on its website but also downstream in used car prices. Used Tesla vehicles cost an average of $32,000 today vs. over $50,000 at the start of 2023.

Declining selling prices have impacted Tesla's gross margin and subsequently its bottom-line profit margins. Gross margin was just 18% last quarter compared to close to 28% at the beginning of 2022. Operating margin has followed the same direction and was just 8.73% last quarter.

Shrinking margins have put Tesla's free cash flow in reverse. Free cash flow was over $7.5 billion less than two years ago. Over the last 12 months, it has fallen to $1.7 billion and was negative in the first six months of 2024. If the company isn't careful and lets this trend continue, it will begin to burn a lot of cash soon.

What about robots and self-driving cars?

With its "We, Robot" event on Oct. 10, Tesla essentially announced a pivot from focusing on traditional automotive manufacturing to robotics and autonomous vehicles. It is investing in a product called the Cybercab that will act purely as a taxi but without a driver. It is building a humanoid robot called Optimus to handle menial tasks. It is building artificial intelligence (AI) infrastructure and software with its Dojo computer. These seem to be the company's main focus instead of updating its vehicles.

But a problem may occur. Deliveries for cars aren't showing much growth, which will impact Tesla's free-cash-flow generation, and this free cash flow is what is fueling the investments into AI, robotics, and autonomous vehicles.

These projects are nowhere near close to commercial viability. In a best-case scenario, they will be profit-accretive to Tesla within a few years, and a decade-long timeline is more likely. CEO Elon Musk has been saying self-driving cars are just a few years away for the last decade and has continued to be wrong about how long it will take. It may be unwise to bet on his optimistic timelines yet again.

If Tesla pushes all of its resources into these three cutting-edge technologies and they take longer to come to market than investors expect, we could see further deterioration in the company's financials.

TSLA Free Cash Flow data by YCharts.

There are no indications that the EV division is ready to take the next step forward, especially because we already saw weak delivery numbers yet again in Q3.

Stick to what the numbers tell you

When it comes to Tesla, there are a lot of competing narratives. The company has its hands in a lot of pies and loves to put on a good show for its product reveals, but investors are best served by ignoring the flash and sticking to the numbers.

Tesla trades at a market cap around $700 billion. It generated $1.7 billion in free cash flow and $7.2 billion in operating income over the last 12 months. That means it's trading at 400 times its trailing free cash flow and 96 times its trailing operating income. No matter how ambitious the company is, this is much too expensive a price to pay for a stock pushing a market cap of $1 trillion.

Most stocks trade at below 30 times earnings. Even the best growth stocks typically only trade at 40 to 50 times earnings. Tesla is trading much higher than this and just posted underwhelming vehicle delivery figures.

There's no reason to buy Tesla stock ahead of its Q3 earnings report on Wednesday.