Tesla Profits Plunge 37% Despite Record Sales — Here’s Why

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1:40market's madness. If money is evil, then that building is hell. The show goes on! The folks in there are ones that show, show! Welcome to Prof G Markets. I'm Ed Elson. It is October 23rd. Let's check in on yesterday's market vitals. The major indices declined on persistent trade tensions. President Trump is reportedly weighing restrictions on software exports to China. Meanwhile, gold continued its fall before pairing some losses in the afternoon. Netflix stock failed to recover from its earnings hit, closing the day down 10%. And finally, semiconductor stocks tumbled after a disappointing earnings report from Texas Instruments.

2:23OK, what else is happening? Tesla reported third quarter earnings yesterday that largely fell short of expectations. Revenue was actually a bright spot, up nearly 12 % from a year earlier. deliveries rose 7 % and auto revenue hit its highest level in nearly two years. But net income fell 37%, weighed down by lower EV prices. And the company also missed on earnings per share estimates. The stock fell more than 4 % after ours. Overall, mixed results from Tesla. Here to help us break down these earnings, we are speaking with Tim Higgins, columnist at The Wall Street Journal. Tim, thank you very much for joining us again on the show.

3:05Well, thank you. We want to get your reactions to these Tesla earnings. Let's just start with top line takeaways. What did you make of the earnings report? Well, we knew it was a record quarter for deliveries. That was as customers rushed out there to take advantage of the end of the tax breaks in the U.S. to buy an electric vehicle. It was part of the broader Trump administration getting rid of those things in his kind of anti-EV push. A lot of people went out and bought electric cars. So that helped Tesla. It really helped them flush a lot of their inventory. A big surprising number, though, was how much profitability fell off.

3:44Profit fell something like 37 % in the third quarter. Not as good as Wall Street was hoping for. and you have to kind of ask yourself, is this as good as it's going to be for a while when it comes to Tesla, given they don't have a lot of new vehicles or really any new vehicles in the pipeline in the near term? That's always a bad thing if you're a carmaker. Yeah, what contributed to that big drop-off in net income down around, I think, 37 %? Why is that? Well, several things, right? A, tariffs are part of it. Tesla pointing that out. It's just more expensive to operate in the current environment.

4:24There are also—Tesla traditionally had a very robust ability to sell regulatory credits to its competitors, those credits out there. The car companies that aren't making as many electric vehicles to meet requirements by the governments around the world. In the U.S., that's kind of evaporating. So you saw that number drop for Tesla slightly, and the expectation is it's going to drop more dramatically in the future quarters. So those are some big areas of hurt. So the stock dropped in after-hours trading. What do you think the market makes of this? I think the initial take from the market is that that profitability figure is concerning.

5:08As you just look ahead and you look ahead with what the company has to play with in an environment in the U.S., Yes, they have brought out a cheaper Model Y SUV, a cheaper Model 3 sedan in recent months, but it's still not, it doesn't really make up for the loss of those EV tax credits, tax breaks that customers were getting in the US. So the idea that essentially you have a price increase on your product lineup that is rather old. You mentioned the deliveries, which are up 7%, highest auto revenue in almost two years. I think a lot of people would see that and they would think, okay, this is good, Tesla's doing well.

5:48But you mentioned that pull-forward effect where you have the EV credit expiring. It did expire. This earnings report is measuring the previous quarter. Therefore, a bunch of people went out and they bought Teslas ahead of the expiration of that credit. How much of this bump do you think is because of that? or do you think we're being unfair to Tesla? I only ask the question because people often say we're often kind of Tesla bears on this show. People often say we're being unfair. It would seem to be a huge bump from people rushing out to take advantage of that tax break, if you will. Maybe we'll see some pickup from the cheaper Model 3, Model Y, though.

6:35That's to be determined. I mean, when you look at it, you know, people want new. And the Model Y and the Model 3, for all intents and purposes, are old in the tooth. And in the car-making business, people want new things every couple of years. And that's one of the challenges that Tesla has. They put a big bet on the Cybertruck, a very kind of unique-looking vehicle that has failed to excite a lot of buyers the way they thought that Elon Musk kind of projected that it would. The cupboard's kind of bare. The next big thing is the robo-taxi vehicle, but that is not a vehicle meant for people to drive themselves.

7:14It's another vehicle that's probably going to be in low volumes to begin with if forever. Who knows? I mean, the projections are huge, right? But we haven't seen kind of the business plan yet for how that's going to work out. People buying it themselves, what markets they can use it in, that sort of thing. So a lot of big questions, a lot of big bets. You know, there are some investors out there who see that as the future, who see humanoid robots as the future, and they're willing to just kind of grin and bear it here for the next few quarters as Musk has suggested. It could be a little rough as they make this incredible transition from being really what is a car company to the idea of a robot company and kind of those getting their sea legs for that.

7:58Did we get any updates on the robots or on autonomy in this report? You know, the free cash flow is interesting. They're sitting on a lot of cash now at Tesla, which is, I think, an important thing because this AI future is going to be very expensive. As you're making that transition, the car, it's still a carmaker, right? It's still depending on making cars. and in a bad economy, if we go into a bad economy, that can just eat a lot of cash. So that's a good position to be in. It's probably a better, more better position than some car companies as they try to figure out how they're going to adapt to the future, especially in a world where if you're a Western carmaker, you're looking at what's coming out of China and you're very nervous.

8:41The world is changing very rapidly, whether it's going to be Chinese automakers or, how AI is going to disrupt the business. How did this compare to GM's earnings, which were released yesterday? What's your picture of GM versus Tesla right now? Well, GM seemed to have ahead of it flushed the bad news. You know, it took some hits on the EV business. And then as they look forward, they've raised their guidance and that the market was really kind of excited about that potential, that maybe they're putting the bad news behind them, kind of readjusted for this complicated EV transition that's ahead.

9:23And I mean, you know, on one hand, it's clear that the EV business for everyone is not growing in the way they thought, yet there's still signs of potential growth. Yeah, just as we wrap up here, valuation, GM's trading at nine times earnings, Tesla's trading at 236 times earnings. Any final thoughts on the Tesla valuation right now? Yeah. If you're an investor in Tesla, a long-term investor in Tesla, you are making a bet that it is going to be a dramatically different company going forward. It's going to be a robot company. It's going to be a robot taxi service. It's going to be a humanoid robot maker.

9:57And you're probably also thinking about what's that future with or without Elon Musk. Remember, his pay package comes up for a vote at the shareholder meeting next month. that's really the big thing that I think is hanging out there is kind of getting that uncertainty taken care of. All right, Tim Higgins, columnist at The Wall Street Journal. Thank you for joining us. We appreciate your time. Thank you. After the break, a new meme stock has emerged. If you're enjoying the show, give Prof G Markets a follow.

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13:13We're back with ProfG Markets. Beyond Meat became the latest meme stock this week, with shares surging more than 1 ,300 % over four days. The frenzy kicked off late last week and got an extra boost on Tuesday when Walmart announced it would expand Beyond Meat's products to more than 2 ,000 stores. Shares soared another 112 % yesterday morning, but by early afternoon, the stock gave those gains back. So, a run-up of over 600 % this week for Beyond Meat, the meat alternatives company, until yesterday when the stock corrected so harshly that the Nasdaq actually had to halt the stock's trading. So what is behind the internet's latest meme stock?

13:55We're not so sure. We don't think investors are quite sure either. So to help us understand this meme stock craze, we are speaking with Luke Cowher, markets editor at Sherwood News. Luke, thanks for joining us once again. Oh, great to be back. So we want to get your breakdown on what is going on with Beyond Meat here. Absolutely ripping and then falling. And then we see the Nasdaq halts the trading of the stock. Where did this all start? What actually caused this obsession with Beyond Meat? So I would say it started really last week when the company early last week announced that it had completed an early previously announced intention to swap some debt for equity.

14:40So this meant that it would be retiring a fair amount of debt that was due in 2027, still having some convertible notes outstanding that now have a higher coupon than what they actually previously retired. But their share count would be going up from about$76 million to$392 million based on this change. So that caused the stock to go to an all-time low of 50 cents. After this, a group of retail traders, and one in particular, who's a Dubai-based real estate developer that Business Insider has reported on, very good work there to give a shout out, started just putting out a thesis about, now that the debt has been mostly eliminated, This is a very positive runway for the company.

15:29Anything can happen. The new bondholders won't want to sell these new shares until a certain point. And there's still a decent amount of short interest on the stock. So you know what? There's really nowhere to go but up from here. And so then we saw on Friday, the stock go up 20 % based on kind of the early innings of that thesis. And then this week, in every single session, it's gone up 100%, at least intraday, at its peak. The zenith, I would say, today was when it was up 146, I believe, percent at its peak today, just on the day that was in the pre-market session. And it managed to close down less than 1%.

16:12So we are talking about the craziest four-cent move in a stock that I've ever seen. you've done a lot of uh research on meme stocks could you just describe for us kind of generally the life cycle of a meme stock i mean it sounds like this this meme stock movement really occurred because there was a trader who said something on some message boards on reddit and then slowly but surely and then very very quickly people started to pile in but then i think the question becomes what happens next. So when you look back at all these other meme stocks that we've seen, and we've seen many of them, what is sort of the overall life cycle?

16:53How does it play out? How does it begin? What's the middle? And then what's the end? So first thing in kind of identifying a meme stock move is you have to look to its history. It's a lot easier to be a meme stock if you have effectively crashed, if this is your second chance. Because that means you've been at a height before where people can benchmark to and say, okay, in 2010, you were worth this. In 2021, you were worth this. You were trading at five times forward sales. All you have to do is get back there again, and then we're all rich. So having a previous backstory of any kind of success, whether that's operationally or just being treated well by the market, that's usually a good prerequisite for identifying a name.

17:37The second is you do have to get beaten down a fair bit. I was kind of taught by mentors growing up that you never really short a stock when it's below$5 in terms of a nominal price, because, you know, anything can really happen at that point. It doesn't take as much money to be able to move the stock a lot, have it double, have it get out of hand, and have you really hating your life at that point. So what we got in this case was still elevated short interest. As a percentage float, though, I really got to emphasize that it went down a lot in this case because of how many shares are issued. But having a lot of shorts outstanding is pretty good, not only because it creates the illusion of, okay, there's an us versus them dynamic and there's someone here that is going to lose by virtue of my buying behavior.

18:25That's usually really good in developing community and camaraderie around a name. And then the next thing is the flows. You see flows that are way in excess of what would be kind of required to quote unquote squeeze the shorts. So that to me is the indication that it's really a buyer's binge. Buyers have taken over. You will see it a lot both in terms of just the pure volumes and you will see it a lot in terms of the options flows. And this is the story that, this is the part of the story that we're kind of in and is the most important. I don't necessarily see this as a short squeeze, see it as a buyer's binge.

19:01And for buyer's binges to continue, I'm not going to call it a posi scheme. I'm just going to simply say it bears a lot of resemblance to Ponzi Finance and that you need an increasing amount of buyers in demand to keep the price going up. I don't think that's all too controversial of a statement. So when you're in this kind of stage of the meme cycle, you need to see increasing volumes, increasing options volumes to be able to spur the kind of demand that keeps the stock going up and up and up in seemingly a parabolic fashion. And then kind of the next phase is you either have to prove it or not.

19:35No company stays a meme stock forever. Volumes at some point have to plateau and go down. You have to stand on your two feet. You have to show some signs of operational change in performance. For a lot of companies, being a meme stock is what allows for that. It's having the boom in your share price that then allows you to go out and raise a lot more money and give yourself a new lease on life, give the ability to burn cash for another few years while you figure things out, or perhaps pursue transformational M &A. That was kind of the thesis around GameStop and what it did. But the very interesting story about GameStop is all it's really done since being a meme stock twice is get a really, really strong operator in Ryan Cohen who has controlled cost and now generated positive cashflow for five straight quarters operating cashflow for the first time in GameStop's history.

20:28so nobody really talks about it as a meme stock anymore but what investors still do at that point is they ascribe a pretty high value to the cash on its balance sheet because of the idea that hey we've given the cash to someone who knows what to do with it so that kind of to me is how i see in best case scenarios things going to for meme stocks you effectively you have blow off tops along the way as kind of interest dissipates because you're not producing the same type of consistent and big daily gains that are required to get more and more people interested in the stock. But you have the opportunity, the market has provided you with the opportunity to do something new and different with your business or keep doing the same thing for longer.

21:11Yeah, it's sort of either cross your fingers that management figures their stuff out or cross your fingers that you're not left holding the bag. How do they proliferate online? Is it all Wall Street bets. I mean, we know that's how GameStop came about. We know how that's how AMC came about. I mean, there are many stocks you could choose and many meme stock movements, some more interesting and more explosive than others. But how do they, how does Word get out? Word generally gets out by someone having a strong, well-argued thesis that strikes a chord with people. In the case of GameStop, even, it really, I think, picked up when Keith Gill was posting, you know, effectively screenshots of his position and thesis on Reddit.

22:01But his initial work was on YouTube, live streams, really hardcore fundamental analysis that struck a chord with people and got one cohort in, and then later, many, many more. So I would say there's kind of a variety of sources. WallStreetBets, I would say, is still probably the most prominent. But, you know, So as we're seeing, I've been on Korean message boards for the first time in quite a long while today. So there's certainly other places where it's happening. A lot of Discord servers are things where single stocks are discussed. A lot of trading groups and communities there. And presumably all young people, young people who are quite online.

22:38I would presume that, yes, the Venn diagram here of young men who are willing to take more risk and people who have bought Beyond Meat in the past few days is more or less one circle, yes. But I would say a variety of different places online, very much still WallStreetBets-centered. What is interesting in this case is that the gentleman who brought the thesis forward on Reddit has since been banned from Reddit. Those former posts have been expunged. And one very, very funny thing that interests probably me in particular more than anything else is that a lot of the kind of scraping algorithms that will run, how much is this ticker mentioned on Wall Street Bets to try and get a handle of how much demand or interest there might be.

23:22I feel like Beyond Meat has broken that scheme because nobody there refers to it by its ticker. They call it fake meat. Ten times more than Beyond. So if you're scraping there for a ticker, you're not going to see it nearly as much. That has changed, I will say, a lot in the past day. Very interesting. Luke Kauer, markets editor at Sherwood News. Appreciate you breaking down how Beyond Meat has become such a sensation. Thank you for joining us. My pleasure. Well, if you're reading the headlines, you would probably think that what happened this week with Beyond Meat is somewhat extraordinary or some sort of market-defining event.

24:00We saw huge headlines in the New York Times, in the Wall Street Journal. Barons even made a link between Beyond Meat and Gold, calling them Wall Street's newest odd couple. So there's a lot of interest in this Beyond Meat stock and the Beyond Meat story, and it might make you think that this run-up is novel or surprising or in some way unprecedented. But we should be very clear. Meme stocks, they may once have been novel, but they are definitely not anymore. They are really commonplace. In just the past few months, we've seen Krispy Kreme, which went up 50%. We saw QuantumScape, which went up 200%.

24:41Plug Power up 200%. Navitas up 500%. Opendoor up 1 ,000%. And in each of these cases, you had a company that had no real change in the business, but rather some sort of online fervor, which resulted in coordinated purchasing among traders, and it sent the stock flying. And the same happened here again with Beyond Meat. Now, the numbers might be extraordinary, but the story itself isn't, because what is clear at this point is that meme stocks are here to stay. They are a regular feature of financial markets. They're practically as common as activist investments and SPACs and even IPOs. They are par for the course, which is just an interesting diversion from what they used to be about because they used to be extraordinary.

25:38When you look back at the GameStop saga or AMC, each of which was touted as a big way for retail to fight against the system, to put Wall Street's back against the wall and to bleed them of billions of dollars. And in some cases, it worked. We saw it with Melvin Capital and Archegos Capital, both of which went out of business. But that's not really the case anymore. I mean, these movements are so common and so institutionalized that they are really now part of the system. When you look at hedge funds, nine out of 10 hedge funds are tracking retail traders on social media. Many are hiring meme stock experts, and we're even seeing meme stock ETFs that, of course, charge an expense fee just like any other ETF.

26:27Put another way, what started as this anarchical movement against the system is now a regular feature of the system. They are so frequent that they're almost boring, which begs the question, what is the point of meme stocks anymore? Do they accomplish anything? Do they say anything? Do they stick it to anyone? Or are they just instruments for alpha? A way for traders to make a quick buck, a gambling habit for the terminally online? Now in 2021, maybe that question would have been debated. But four years and hundreds of meme stocks later, we're not so sure.

27:17Okay, that's it for today. This episode was produced by Claire Miller, edited by Joel Passon, and engineered by Benjamin Spencer. Our associate producer is Alison Weiss. Our research team is Dan Chalon, Isabella Kinsel, Kristen O'Donoghue, and Mia Silverio. And our technical director is Drew Burrows. Thank you for listening to Prof G Markets from Prof G Media. I'm Ed Elson. Tune in tomorrow for our conversation with Daron Asimoglu.