Is Elon Musk right that a Tesla turnaround is near?

Here's an explanation on why Tesla's shares rose before issuing its first-quar earnings report. 

The shares had fallen so hard and so fast that some investors found the opportunity irresistible. 

On Monday, Tesla  (TSLA)  hit a 52-week low of $138.80, producing a relative strength index value of $27.84 before closing at $142.05. Relative strength measures the stock price against the trend. A reading under 30 suggests the stock is oversold. 

Perhaps in response, buyers started to nibble at the stock. On Tuesday, they nibbled more ahead of Tesla's first-quarter earnings report, pushing the shares up 1.9% to $144.68. 

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And then the earnings came out. Ugly, to be sure. But deep in the report — on page 10, to be exact - Tesla offered a reason to keep the faith about the company: 

"We have updated our future vehicle line-up to accelerate the launch of new models ahead of our previously communicated start of production in the second half of 2025."

The shares promptly jumped higher, finishing after hours at $163.96, up 13.3% from the Tuesday close and 18.1% from the intraday bottom on Monday.

Proving a turnaround is nigh may take time

The stock's big after-hours jump, which came as stocks enjoyed a second day of gains, does not mean Tesla's struggles since the stock's $299.29 peak last summer are over. 

Rather, investors seemed to be saying something like: "Good. You're finally focusing on turning the ship around."

So, here are several key points showing just how ugly was Tesla's earnings report was:

• Revenue of $21.3 billion was down 9% from the 2023 first quarter.
• Automotive revenue of $17.4 billion fell 13% from a year ago. 
• Tesla's gross profit margin slid from 19.3% a year ago to 17.4%. 
• Net income tumbled 55% to $1.12 billion, or 34 cents a share, from $2.54 billion, or 73 cents a share, a year earlier. The Street estimate had settled in at about 48 cents. 
• Free cash flow, a key metric, was negative $2.5 billion, down from $441 million a year ago and $2.06 billion in the fourth quarter.

Plus, Tesla said last week it was laying off 10% of its global staff of 140,000, including 6,000 in California and Texas.

How Tesla stumbled

The causes of Tesla's staggering stumble since last fall are fairly well known. 

Electric-vehicle sales are stumbling globally, especially in the United States, where Tesla has a 55% market share. Ford  (F)  and General Motors  (GM)  have been throttling back their EV plans. A big issue is that they are costly.

Global competitors are increasingly aggressive, especially those from China. And first-quarter results were affected by damage to a Tesla plant near Berlin, Germany.

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Competitors, especially Toyota  (TM) , have been touting hybrid vehicles, which historically been cheaper than EVs.

Tesla has not had a product with a lower price meant to attract mainstream buyers. Hence the interest that cheered investors: the accelerated schedule for bring moderate-priced vehicles to market. 

The goal, CEO Elon Musk said, is to build the moderate-priced vehicles using new technologies and components of existing vehicles.

Tesla has also struggled with manufacturing problems with some of its cars and trucks.

The widely ballyhooed Cybertruck has not taken off with buyers in part because of manufacturing glitches. All 3,878 vehicles produced from November 13, 2023, to April 4, 2024, have been recalled to fix an accelerator-pedal defect

But Musk bristled at the idea that Tesla is just a car company.

During the earnings call, he insisted (as he did in January) that Tesla is really "an artificial intelligence robotics company." That is: A company that will help convert the auto industry to one that only produces electric vehicles.

He has Tesla working on developing robo-taxis, a product that may take years to develop. 

The future is electric and self-driven with vehicles commanded by software that Tesla sells to customers and gets a monthly fee from. 

Tesla's turnaround will start later this year, Musk said, and it will be good enough to generate more than $1 billion in free cash flow for the year. 

Maybe. There was some show-me thinking visible during Tuesday's earnings call. A few analysts wondered if Musk has spread himself too thin, a thought he scoffed at.

Meanwhile, some money managers, especially Cathie Wood of Ark Investment Management, are deeply committed to Musk's vision that Tesla is one of the great technology disrupters. 

Woods' firm has been buying heavily into Tesla as the shares have slumped. The ARK Innovation Fund  (ARKK)  now holds 4.25 million Tesla shares worth about $619 million.

Tasha Keeney, Ark's Director of Investment Analysis and Institutional Strategies, said the firm has a $2,000 price target on the stock by 2027 and may be raising it soon.

Many analysts will likely weigh in on the topic on Wednesday. 

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