Tesla’s Next Profit Is Anybody’s Guess. Watch These 2 Points Instead.

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No one knows what to expect, or what investors will focus on, when

Tesla

reports its quarterly earnings on Wednesday, but the key points to watch are clear: cash flow and demand.

Lockdowns in China to fight Covid-19 constrained production at

Tesla

(ticker: TSLA), as well as for the entire Chinese auto industry, in the second quarter. The output lost at

Tesla
’s
Shanghai plant, which is the company’s most productive factory, makes it nearly impossible to accurately project the EV maker’s profits.

All things considered, Tesla’ should probably earn less than Wall Street expects. Profit forecasts for the second quarter started out at about $2.30 a share. Now they are at about $1.85, down about 20%. Forecasts for vehicles delivered, on the other hand, started out at about 350,000 units, but the company only delivered 254,695 cars during the quarter. That’s a 27% drop, seven percentage points worse than the decline in estimates.

Fewer deliveries reduce revenue, but the damage is likely to be worse in terms of profits. At any manufacturing company, percentage losses or gains in sales are typically magnified on the bottom line. Tesla, for instance, had all its fixed costs throughout the second quarter, but it didn’t have all of its production.

The setup for the second-quarter results announcement is similar to the situation Barron’s described before Tesla’s first-quarter results came out in April. Tesla had delivered fewer cars than Wall Street expected, but forecasts of earnings barely budged.

Still, earnings came in higher than expected, at $3.22 a share, about $1 higher than Wall Street projected. Prices for Tesla’s cars turned out to have been better than forecast and inflation didn’t raise costs as much as expected.

Inflation is still a problem, but vehicle prices continue to march higher. Prices for Tesla vehicles are up in the range of 25% to 30% year over year, according to the company’s website. Rising prices and costs may turn out to have been a wash for Tesla in the second quarter.

But in the first quarter, Chinese production was a record 182,174 units. In the second quarter, because of Covid, production fell to 112,583 cars. That matters because the Shanghai facility is the company’s lowest-cost operation.

At the same time, Tesla was ramping up production up at two new facilities, in Texas and Germany, in the second quarter. CEO Elon Musk referred to those plants as “money furnaces” in a recent interview. That could mean the process of boosting production has gone slower than expected. Tesla didn’t respond to a request for clarification of Musk’s comments.

All of those complexities mean that Tesla’s second-quarter earnings likely won’t offer a clear picture of the company’s prospects for the near and medium term. It makes more sense to focus on cash flow and order rates.

The consensus estimate for free cash flow started out the quarter at about $2 billion, but it is now at about $500 million. New Street Research analyst Pierre Ferragu believes Tesla might only break even in terms of free cash flow. That downbeat view comes from a man who rates the stock at Buy, with a target for the share price of $1,580, the highest on Wall Street, according to Bloomberg.

If Tesla turns out to have generated any free cash flow in the tough second quarter, investors should be pleased.

Orders for Tesla cars are another critical indicator, showing how well demand is holding up despite inflation, rising interest rates, and a slowing economy. “Watch the cadence of orders,” says Canaccord analyst George Gianarikas. “The good news for Tesla is they have so many orders.” The wait for a new, base-level, Model Y stretches into the first quarter of 2023.

Whether lead times are increasing or fall is a key factor for Gianarikas. He is positive about the stock, rating it at Buy. His target for the price is $801, which is 25 times his estimate of 2025 earnings per share.

Investors will probably have to wait for the earnings conference call to get details about orders from management. Tune in at 4:30 p.m. Eastern time on Wednesday.

As of the close of trading on Friday, Tesla stock wa down about 32% so far this year, worse than the 19% and 27% comparable, respective declines of the

S&P 500
and

Nasdaq Composite
Index.

Write to Al Root at allen.root@dowjones.com