The headlines around after-hours earnings yesterday were, understandably enough, dominated by Tesla (TSLA) and the impact of a conscious decision by Elon Musk and his team to pursue growth over profit margins. After a quarter marked by price cuts on several models, the market was shocked, shocked I tell you, that selling cars for less resulted in lower margins. Sarcasm aside, though, the big reaction in that heavily tracked stock somewhat obscured another release that showed good results from an ”old tech” giant, IBM (IBM).
The granddaddy of computer tech delivered exactly what the market had been looking for: a bottom-line beat and decent cash flow. However, that came despite uninspiring revenues, meaning that they reported the opposite of Tesla, better than expected margins. They earned an adjusted $1.36 per share versus a consensus estimate of $1.26 on revenue of $14.25 billion versus expectations for $14.35 billion. The stock is trading higher in this morning’s premarket as a result, but only by just over one percent.
In reality, the reaction to both of those earnings reports present opportunities for investors, albeit for very different reasons.
For the reasons implied above, the big drop in TSLA this morning looks like an overreaction. Obviously, lower margins are not a good thing in themselves, but they shouldn’t have really been a surprise. Do they merit such a big drop when they are the result of a conscious decision to pursue sales growth? Well, it seems that they do, at least to a market where "growth" is currently a dirty word.
However, Tesla has a history of pursuing growth at all costs. The company was criticized for years by the legion of haters for plowing money back into growth rather than focusing on “shareholder value,” but that worked out pretty well for those who ignored that criticism and held on to the stock. I am not saying that percentage gains measured in the thousands will be the result this time around as it was before, but Tesla has shown that it can deliver profit while continuing to grow, so punishing the stock for just that doesn’t really make much sense. In the long term, margins shouldn’t matter too much at this point in Tesla’s development, but to traders with a short-term view, they clearly do.
The IBM story is also about margins, but in a different way. It is a company that is transitioning from what has become a low margin, hardware-focused business to one more about business services and cloud computing. It is an overdue shift, but one that CEO Arvind Krishna seems to be managing well. They showed growth in their software and consulting divisions, while the more traditional infrastructure business shrunk by around 3%. That is why margins were better than expected, and it bodes well for the future.
The future is the point here in both cases. In very different ways, both Tesla and IBM are looking forward, but that is not what traders want to see right now. The market is rewarding individual companies who are pulling in their horns, cutting costs to prepare for tough times ahead, even as the bond and equity markets more generally are signaling a very good chance that those tough times will be nowhere near as tough as feared -- if it comes at all.
Something has to give here. Either there will be a severe pullback or a recession, in which case stocks like TSLA and IBM will have the bad news priced in to some extent; or there will not, in which case the reactions to Q1 earnings that we are seeing in their stocks, negative in one case and muted in the other, will look like big opportunities in a few months. Either way, over the next few days, both TSLA and IBM are buys for long-term investors.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Martin Tillier
Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.
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