Tesla Earnings Were Great. Why the Stock Is Dropping.

Tesla reported $1.86 in per-share earnings from about $13.8 billion in sales, beating Wall Street’s estimate for about $1.67 a share but missing its forecast for $13.9 billion in sales. Earnings were a record, and better than expected, but analyst estimates have been rising—by about 20 cents a share—in recent weeks after Tesla reported stronger-than-expected third-quarter unit deliveries on Oct. 2.

The company delivered about 241,000 vehicles, roughly 10,000 to 15,000 more than analysts projected. What’s more, Tesla managed to ship about 40,000 more vehicles than it did in the second quarter of 2021 despite the semiconductor shortage that has constrained global auto production.

Tesla’s strong deliveries had already boosted the stock. Its shares had gained about 12% between the delivery results and Wednesday. The

Nasdaq Composite Index
is up about 4% over the same span. Tesla stock has risen 31% over the past three months.

The semiconductor and supply chain woes have led to higher costs for all auto makers. Gross profit margins, however, came in at almost 27% compared with about 24% in the second quarter of 2021. Automotive gross profit margins hit 30.5% even though the company got less cash from regulatory credits. Higher volumes out of existing plants is a big reason for improving profit margins.

Regulatory credit sales are always a topic of discussion for investors. Tesla is able to sell regulatory credits because it produces more than its fair shares of zero-emission vehicles. Regulatory credit sales have totaled $3.4 billion over the past three years. Credit sales totaled $279 in the third quarter, the lowest level since the fourth quarter of 2019.

Lower credit sales, however, didn’t stop Tesla from reporting another record quarterly operating profit. Reported operating profit topped $2 billion for the first time, up from $1.3 billion reported in the second quarter.

Overall, the result looks good enough to keep shares just about flat. Bulls might have hoped for a new high, eclipsing the $900.40 set back in January, but might have to wait a little longer to see a 9 at the front of the stock price.

Management hosted a conference call beginning at 5:30 Eastern time to discuss results. Investors asked questions, mainly, about profits, growth and autonomous driving software.

Tesla management sounded content with profit margins, but warned investors that margins might not continue to expand while new plants ramp up production. Tesla expects to begin production at its new Texan and German facilities in 2021 with customer deliveries starting shortly thereafter. That’s inline with current investors expectations.

Finally, investors expressed growing concern with increasing regulatory scrutiny over autonomous driving systems. Tesla management sounded sanguine, saying Tesla always works with regulators and would continue to do so as self-driving systems become more complicated.

The conference call didn’t contain any major surprises. The biggest surprise for investors might be that CEO Elon Musk wasn’t on the call. Chief Financial Officer Zachary Kirkhorn handled the bulk of the questions.

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