Tesla (TSLA) will release its third quarter (Q3) earnings after the market closes this Wednesday, Oct. 23. While the electric vehicle (EV) maker managed to grow its Q3 deliveries on a sequential and year-over-year basis, lower average selling prices and heightened competitive activity could pose challenges, and will likely pressure its earnings. 

Ahead of the report, let’s dive into the key factors that could shape Tesla’s performance.

Q3 Revenues: A Mixed Outlook

Tesla has faced headwinds in its core automotive business, particularly in China, one of its most critical growth markets. Weaker demand and fierce competition have been significant hurdles, and that's reflected in Tesla’s stock price, which has dropped around 12.6% year-to-date. By contrast, the S&P 500 Index ($SPX) has risen by 22.7%.

However, in Q3, Tesla produced roughly 470,000 vehicles and delivered about 463,000. While this was a slight beat of analysts’ expectations, and marks a year-over-year and sequential increase, the bigger picture is more complex. Tesla’s growth in volume has been primarily driven by price cuts and low-interest financing, which means the company has had to sacrifice its average revenue per vehicle. The automaker had previously mentioned offering attractive financing to offset high interest rates, and these strategies are likely to have impacted Q3 revenues, as well.

What’s important is management’s comments around potential volume growth in 2025 and beyond, with the refreshed Model Y and the promise of a more affordable EV model on the horizon. Any positive comments on these developments could boost Tesla's stock.

Energy Business: A Key Growth Driver

Tesla’s energy segment could offer a bright spot in the Q3 results. The company deployed 6.9 GWh of energy storage products during the quarter, which is a step down from Q2’s 9.4 GWh. However, Tesla had already cautioned that large-scale projects could cause uneven quarterly deployments. 

Even with the dip, the energy business is expected to remain a strong revenue and earnings driver, thanks to its solid backlog and ramping capacity.

Tesla’s Q3 Earnings to Decline

Tesla’s earnings could continue to decline sequentially and year-over-year. Wall Street forecasts earnings of $0.46 per share for Q3, down from $0.66 in the same quarter last year and from $0.52 in Q2 of 2024.

The bottom line could benefit from Tesla's focus on company-wide cost reduction, including reducing the cost of goods sold per vehicle, accelerating the development of its AI-enabled products and services, and growing its traditional hardware business. Further, its energy storage business will likely generate strong gross profit, supporting its bottom line. 

However, lower average selling prices to boost volumes, along with an increase in operating expenses driven by AI projects, will weigh on its bottom line.

What’s Next for Tesla?

Tesla’s long-term potential remains solid, especially with the introduction of a more affordable EV model, advancements in full self-driving (FSD) technology, and the anticipated launch of its Robotaxi service. Moreover, Tesla’s investments in AI and robotics hold promise. 

However, the company faces significant hurdles in the near to medium term. Competition and pricing pressures in the EV space will likely limit earnings per share (EPS) growth, and it will take time for Tesla’s software and FSD businesses to reach their full potential.

Valuation Concerns

Another factor that could hurt Tesla stock’s recovery is its current valuation. The stock trades at a lofty 85.8 times estimated 2025 earnings of $2.55 per share. Given the challenges Tesla faces, particularly around margins and the competitive landscape, this valuation appears expensive, especially considering the uncertainties surrounding FSD and the Robotaxi timeline.

Final Thoughts on TSLA Ahead of Earnings

While Tesla’s long-term prospects remain solid, it faces near-term challenges that could impact its earnings growth. 

With analysts keeping a “Hold” consensus rating and an average price target of $205.02, Wall Street appears cautious, anticipating roughly 6% downside from current levels.

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