Should You Buy Tesla Stock Before Wednesday Afternoon?

Earnings season kicked off last week. It was largely the banking giants and other financial stocks stepping up, proving once again that their bean counters can come through with crunching quarterly numbers pretty fast. This week will feature a more diverse collection of companies stepping up to the plate.

The largest company reporting this week -- in terms of market cap and headline rattling -- is Tesla (NASDAQ: TSLA). The country's leading producer of electric vehicles (EVs) will announce its third-quarter results shortly after market close on Wednesday. There's a lot riding on the report, especially when it comes to any insight that Tesla may provide on its near-term outlook.

It's a test drive for earnings season

Shares of Tesla have nearly doubled over the past year. It's a sharp contrast to the fundamentals. Revenue over the past 12 months has declined 3%, with a double-digit dip across all profitability metrics. As bad as things have been, things could be about to get worse.

The expiration of the $7,500 tax credit for electric vehicles last month is a blow to Tesla's flagship business. The automaker sells the high-end Model S and Model X at price points that didn't qualify for the tax break available to most auto shoppers, but the other models accounted for 97% of the 497,099 vehicles that Tesla delivered in the third quarter.

Wednesday afternoon's announcement of Tesla's third-quarter results and subsequent earnings call should feature a spike in auto sales as folks scrambled to get in before the tax credit ended. Tesla already announced its delivery and production numbers for the period earlier this month. The real concern now is where EV sales -- and EV stocks in general -- go from here.

Image source: Getty Images.

Shifting into a new gear

It's fitting that Tesla's production during the third quarter was well short of the number of vehicles it actually delivered during the period. Tesla and its automotive stock peers are bracing for a near-term lull in EV sales outside of the luxury market that wasn't impacted by the tax credits. This doesn't mean that Tesla is toast.

Tesla is already introducing lower-cost, stripped-down versions of its most popular cars to woo those who missed out on the EV credits. Buyer's remorse may get in the way of those entry-level versions taking off, but at least Tesla is addressing the cost crunch with the $7,500 breaks vaporized. There are thankfully other levers that the automaker can play with to get back on track.

Its energy storage business is still growing. CEO Elon Musk has proposed that its Optimus robotics business -- cranking out home bots to tackle more than just rudimentary household chores -- could be even bigger than today's slate of EVs. The long-running bullish thesis for Tesla as a leader in self-driving cars is still in play, and gets better with every over-the-air update. Growing its base of car drivers should help that business scale if Tesla even achieves truly autonomous driving. Tesla's role in self-driving vehicles is even stronger now with the recent public rollout of its robotaxi business in select markets.

On the road again

Despite the scramble to purchase Model Y, Model 3, and some Cybertruck vehicles ahead of the tax credit deadline, analysts see revenue rising less than 6% to $26.6 billion for the third quarter that Tesla will discuss this week. Overall sluggishness in EVs and Tesla's waning popularity in key overseas markets are weighing on the business. However, even the modest 6% increase is better than the negative revenue growth it posted in back-to-back quarters to kick off 2020.

The prognosis is less flattering on the bottom line, where analysts see adjusted earnings sliding 24% to $0.55 a share. It will be Tesla's third consecutive quarter with a double-digit percentage decline in profitability. Tesla can always come through with a bottom-line beat, but it has missed Wall Street profit targets in each of the three previous quarterly updates, also falling short in five of the last six reports.

The real driver after the market close on Wednesday will be its vision. Analysts see Tesla rebounding with double-digit growth on both ends of its income statement in 2026. The road conditions may seem slippery right now with ho-hum results and an elevated share price, but Tesla's long-term track record of innovation and delivering market-thumping results is hard to question when you zoom out to see the bigger picture.

Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.