Expect Tesla earnings to be downright weird

Tesla will report fourth-quarter 2016 earnings after the bell on Wednesday. For the record, Tesla posted a surprise profit for the third quarter.

But that was then.

Analysts surveyed by Bloomberg expected the company to have lost almost $160 million for the quarter, or $1.04 per share on an adjusted basis. Obviously, Tesla could lose less than that and notch a beat.

But the breakdown of earnings for the quarter is sort of beside the point. Tesla shares have been rallying since the beginning of the year and have threatened their all-time highs. In the last week, some of the gains have been giving back, but on Tuesday, shares were trading up around 2% to $279.

Apart from the potentially Trump-friendliness of Tesla making a lot of stuff in the USA, the rally lacks a solid fundamental basis. Yes, Tesla appears to be burning less cash than expected, but if the company launches its $35,000 Model 3 vehicle later this year, that's going to be very expensive. The company also missed rather badly on its vehicle-delivery guidance, but CEO Elon Musk's promise of 500,000 units in annual production by 2018 still stands.

Anyone who has followed Tesla's stock performance for any length of time knows that the spikes and swoons are typical. What's really at issue with the upcoming earnings announcement is how much weirder the reporting is about to get.

Weird science

It was already weird. Tesla combines a record of quarterly losses with a record of missed vehicle launches and a record of guiding high on deliveries and missing. Yet, the market cap of $44 billion is now within a few billion of Ford's. The company is also composed of three intersecting, but not truly complementary businesses: electric cars, energy storage, and battery manufacturing.

Actually, there's now another business: solar power, with Tesla's acquisition last year for $2.1 billion of SolarCity. (There's also a refueling business, the Tesla Supercharger network, but it can be considered as an enabler of the EV business.)

Most analysts haven't really even worked SolarCity into their models yet. If they've even considered the issues, they've seen solar adding effectively zero to Tesla's value or expressed concern about SolarCity's impact on the balance sheet.

UBS's Colin Langan is in the latter camp; he's a Tesla bear with a $160 target price and a "sell" rating on the stock. In a research note published last week, he wrote that "[w]ith the closure of the SCTY merger, TSLA is assuming numerous risks ... We continue to believe SCTY is an unneeded distraction during a very challenging launch period."

Previous to the SolarCity merger, the analysts who covered Tesla were mainly autos people. Now energy analysts will probably be entering the picture in bigger numbers. So we'll have point-of-view on the transportation side of the business and point of view on the solar side, but those perspectives may have no logical meeting point. Mixed in will also be the energy storage and battery manufacturing components.

A holding company

Tesla has thus become a holding company, but not a holding company such as General Motors, which essentially runs two business: auto design, manufacturing, and marketing; and financial services - with both business deeply interconnected via the consumer.

Assuming Tesla doesn't stage another big earnings surprise, the conversation around Q4 and FY 2016 will likely break down into three key elements:

1. 2017 deliveries guidance

In order to achieve 500,000 in annual deliveries by 2018, Tesla needs to do better than 100,000 in total production in 2017. It's not inconceivable that the Model 3 will rapidly ramp after a late-2017 launch, especially given the test vehicles are about to start production this month, according to reports. But Tesla would have to figure out a way to assemble 400,000 additional cars in 2018, after failing to build even 90,000 in 2016.

Skepticism regarding Tesla guidance in common. But it will increase if Musk reaffirms that 500,000 number on Wednesday.

2. Model 3 launch timing

The Model 3 looks as if it will launch on schedule in late 2017. That doesn't mean that very many cars will be delivered in 2017 - more likely, full production won't arrive until mid-2018, at the earliest. But the Model 3 launch will carry tremendous symbolic value, as Tesla transitions from being a niche market player to a major automaker. The stakes are preposterously high. If Tesla pulls it off, that alone could vindicate the bullish sentiment around the company.

3. Ride-hailing competition

Expect Morgan Stanley's Adam Jonas, a forward-thinking analyst, to get a question in on this one. Tesla's businesses may all be focused on Trump-positive US manufacturing and job creation, but the most critical of these, the automobiles, are all-electric and a part of the previous big disruption in mobility. The new disruption is ride-hailing, of the Uberized variety - in a futuristic sense, ride-hailing using self-driving cars.

Tesla has Autopilot, but as good as that semi-self-driving system is, it isn't fully autonomous. And while Tesla is a carmaker, Uber has no real liability in that capital-intensive space; it is a high-tech, software-and-smartphone driven facilitator of transportation. Tesla is heavy. Uber is light.

In this business, Uber's pre-IPO valuation is already $20 billion more than Tesla's. Musk and his team are aware of this and have introduced the Tesla Network as a competitor, but it's unclear how that network will function - and whether Tesla's investment in the previous disruption means that it won't be able to catch up with the newer and arguably more momentous one.

The upshot of all this is that Tesla will probably post a big loss for the fourth quarter and a loss overall for 2016. Nothing exotic there. But Tesla will also be introducing itself to Wall Street for the first time as a far more intricate financial puzzle. That's bound to induce some oddball questions from analysts and some interesting responses from Musk and his team.

In short, this could be either the most confusing or entertaining earnings report in Tesla's history.