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Earnings Watch: Can Tesla convince the market about growth?
Peter Garnry
Chief Investment Strategist
Summary: This week, a large number of companies will report earnings, including Netflix, Tesla, and ASML. Investors will be watching these earnings reports closely to see how they impact the market. We believe Netflix can exceed estimates for Q4, boosting sentiment in technology stocks. Tesla is facing increased competition and may have to abandon its growth targets in the near-term future. ASML is expected to have sluggish revenue growth in FY24, but analysts expect revenue growth to increase to 22.3% in FY25. The Q4 earnings have so far been positive, with especially financials and consumer discretionary companies delivering the biggest positive surprises. Technology stocks have been pushing equities to new all-time highs, and operating income (EBITDA) has massively rebounded for Nasdaq 100 companies in the previous two fiscal quarters.
Key earnings week ahead
The Q4 earnings season has been dominated so far by US financials, but this week the earnings season broadens out to industrials, technology and health care. The list below highlights the 30 largest market cap companies reporting earnings this week.
- Tuesday: Verizon Communications, Netflix, Texas Instruments, Intuitive Surgical, Johnson & Johnson, Procter & Gamble, General Electric, RTX, Lockheed Martin
- Wednesday: SAP, ASML, Elevance Health, Tesla, IBM, ServiceNow, Lam Research, Abbott Laboratories, AT&T, Progressive
- Thursday: Union Pacific, T-Mobile US, Visa, LVMH, Intel, Comcast, Blackstone, NextEra Energy, Marsh & McLennan
- Friday: Christian Dior, American Express
Based on retail investor exposure the three most important earnings releases this week will be Netflix, Tesla, and ASML setting the sentiment for US equities during the week. Next week the earnings season gets into its most important week with earnings releases from the largest US technology companies.
Earnings preview: Netflix, Tesla, and ASML
Netflix: Full speed on margin expansion and growth
- Reports FY23 Q4 earnings tomorrow (aft-mkt). Analysts expect revenue growth of 10.9% y/y and EPS growth of 142% y/y due to compounding effects of momentum in advertising revenue, higher subscriber growth and subscription price increases.
- Given the momentum in Netflix business our view is that the company is poised to exceed estimates for Q4 boosting sentiment in technology stocks this week.
- Netflix is on track to deliver $6bn in free cash flow in FY24 which equates to a free cash flow yield of around 3%.
- Key focus for investors is the outlook for revenue growth in FY24 which is estimated at 13.8% y/y.
Tesla: Growth delusions and gross margin fight
- Reports FY23 Q3 earnings Wednesday (aft-mkt). Analysts expect revenue growth of 6.3% y/y, the lowest since the -4.9% y/y growth in FY20 Q2 during the pandemic. EPS is expected at $0.53 down 44% y/y as competition has increased and especially on pricing.
- BYD has overtaken Tesla on deliveries becoming the world’s largest battery EV maker and is also beginning to make inroads in the higher priced segment that Tesla has dominated.
- Tesla has previously promised investors 50% annualised growth for 10 years, but with revenue growth expected in FY23 at 19.8% and 20.7% in FY24, the question is whether Tesla will soon be forced to abandon its growth targets.
- Tesla must convince investors that growth will resume from the current low levels to levels above +20% growth while preserving gross margin which has slipped below 20% down from 25.6% in FY22.
- Lower prices on lithium carbonate is helping on sustaining gross margin while cutting prices to keep up with Chinese competitors, but any further flip in gross margin outlook could become toxic for Tesla’s stock price.
ASML: Surfing the boom in AI investments
- Reports FY23 Q4 earnings on Wednesday (European pre-mkt). Analysts expect revenue growth of 7.6% y/y and EPS of €4.80 up 5% y/y.
- Key focus for investors is the FY24 revenue growth outlook. Analysts are quite bearish with only 0.4% revenue growth projected setting a low bar for the Dutch semiconductor equipment maker. However, the sluggish revenue growth projections come on the back on a weak ASML guidance in October of unchanged revenue in 2024.
- Looking beyond 2024 analysts expect revenue growth to increase to 22.3% in FY25 and EBITDA hitting €13.3bn.
- The key driver for ASML beyond 2024 is the CapEx signals from TSMC, the world's largest foundry chip maker, indicating strong focus on 3 and 2 nanometer chips which will boost demand for ASML’s extreme ultraviolet machines which the company controls with a 100% market share.
Q4 earnings are off to a good start as technology earnings soar
The Q4 earnings have so far delivered a net positive surprise on both revenue and earnings with especially financials and consumer discretionary companies delivering the biggest positive surprises. The message from US banks also leaned on the positive side for 2024 although acknowledging the key risks to the economy. JPMorgan Chase is expected to expand the business this year and the net charge-offs (bad debt written off) in percentage of loans are still running at very low levels approaching the average level from the years before the pandemic.
There have been a lot of talk about the rising technology stocks pushing equities to new all-time highs. Some argue that it is crazy and animal spirits are too wild and not backed by reality, but in fact the reality is actually that operating income (EBITDA) has massively rebounded for Nasdaq 100 companies in the previous two fiscal quarters supporting the ongoing rally in technology stocks.
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