Motley Fool Money - Tesla’s Margins Face Headwinds

Episode Date: October 23, 2025

There are a plethora of so-called stock market calendar effects. What are they and how should Foolish investors think about them? Matt and Jon also take a look at Tesla’s latest financial report as well as make some bullish stock predictions for two companies that were previously booted from the S&P 500. Jon Quast and Matt Frankel discuss: - Calendar related trading patterns such as tax-loss harvesting season, the Santa Claus rally, and the January Barometer. - Tesla’s financial results for the third quarter of 2025. - Stocks on our radar – companies that were removed from the S&P 500 within the last 18 months Companies discussed: ETSY, ENPH, AMZN, TSLA Host: Jon QuastGuest: Matt FrankelEngineer: Bart Shannon Advertisements are sponsored content and provided for informational purposes only. The Motley Fool and its affiliates (collectively, "TMF") do not endorse, recommend, or verify the accuracy or completeness of the statements made within advertisements. TMF is not involved in the offer, sale, or solicitation of any securities advertised herein and makes no representations regarding the suitability, or risks associated with any investment opportunity presented. Investors should conduct their own due diligence and consult with legal, tax, and financial advisors before making any investment decisions. TMF assumes no responsibility for any losses or damages arising from this advertisement. Learn more about your ad choices. Visit megaphone.fm/adchoices

A lot of people are starting to look at their calendars, but is that where long-term investors should be focused? This is Motley Full Money. Welcome to Motley Full Money. My name is John Quast. I'm joined today just by Matt Frankel, my colleague and contributor, longtime full contributor, and we are looking at several things today. We're looking at some stocks on our radar. We're going to talk some Tesla earnings, but first up, we're going to start hearing some of these calendar terms and investing in coming weeks and months. And Matt and I just want to start to cut through some of the noise that you may start to hear. And there are just a lot of people out there who make investment decisions based on the calendar. And we'll talk more about that in just a moment. But we want to

start off here by talking about some terms. And so one of the terms you may start hearing is tax loss harvesting. We're entering into tax loss harvesting season. Matt, what is tax? loss harvesting and why do people start talking about it right now? Yeah, so tax loss harvesting is the thing we're going to talk about that's not really noise. It's a legitimate investment concept. It means selling positions at a loss with the specific goal of using that loss to then lower your tax liability. Now, this can be used to offset a capital gain from a stock you sold or just to lower your taxable income. You can use up to $3,000 of losses per year to offset the rest of your taxable income. But the important thing you are to keep in mind, and honestly, this

is the topic we could spend an entire episode of this on, is that this is, it's not a great idea to sell just because you want a tax break if you're still interested in owning the stock otherwise. Yeah, I think that's such a great point to make, Matt, because one of the things that we understand about stock market investing is if you're invested in an individual stock, what can happen in a single year is it can be quite volatile. You can be up profoundly or you can be down very despairingly, and we really don't want to judge an investment success or failure based on just a few months. So it can be tempting sometime to buy into a stock we believe in for the long term, be tempted to sell it after just a couple of months of poor performance to get

that tax loss. You're saying maybe not the best strategy there, but if you're ready to move on from something. No. I mean, if it's a stock that you're like on the fence about selling and could use the loss for your taxes, then go for it. But if it's something that you like that just went down. It's not worth selling just to get a tax break. Well, thank you for that. And before we move on, you know, there's so many other calendar related things that we can hit. Tax loss harvesting right now, people are thinking about taxes at the end of the year. But there are so many other things we could talk about. We could talk about the January effect, the October effect, the February slump, the year and rally. But I just picked out one more here, the Santa Claus rally and the January barometer.

These are some terms that people might start hearing in the next six weeks or so. These are other calendar effects. What are these two about? Yeah, and these are just rules of thumb, and they work until they don't. There's another one you didn't mention called sell in May and go away. The market tends to have like kind of a week or summer than during like the busy winter season. But the Santa Claus rally that you're talking about refers to the historically strong performance of the stock market during the last five days of December and the first two days of January.

the trading year. So since 1950, the stock market has risen 79% of years in this period, and by an average of 1.3%, which is a pretty big move in a seven-day period. It's often considered to be a bad sign by investors if the market doesn't produce the Santa Claus rally. And similarly, the January barometer, it's a common belief that if the market gains in January, it's a good indicator that it's going to gain for the full year. I mean, some of this is just the market's upside bias over time. But whether the market rises in January or not has accurately predicted a positive or negative full year return 85% of the time since 1950. It's only gotten it wrong. I think 11 times. Yeah, that's pretty incredible. I mean, Santa Claus Rally,

79% accuracy. January barometer, 85% accuracy. And so I think that if you're looking at this, maybe you're new to investing and you're starting to think, oh, I want to know when is a good time to buy, you start looking at some of these calendar effects and you start thinking, maybe I can use this to my advantage. But you and I both still believe that the best way to build wealth over the long term is to buy at least 25 high quality businesses, buy their stocks, and hold on to them for at least five years. And, you know, when you think about a five-year holding period, okay, what are we talking about when we're talking about the Santa Claus rally? Okay, yes, It usually happens, but we're talking about a 1% gain, a 1.3% gain on average.

The same thing with the January barometer. I mean, these are small, yes, usually up, but it's a small gain usually. And we're looking at five years. We're hoping to have invested in something that's multi-bagging opportunities, right? And so when you're thinking about a difference of a percent or two, maybe really not all that consequential over the long term. And it can be detrimental, right? to base things solely on this because think about 2021, for example.

January, the stocks were down 5%. Now, if you're using this as a thing to guide your investing, you would say, I'm not investing in 2021 because the January barometer says not to. In 2021, stocks were up 27% for the year. One of the greatest returns ever. And so you wouldn't want to have missed that. So, Matt, I guess my question is, Is there any way we can use things like this?

Tax loss harvesting season, Santa Claus rally. Is there any way that long-term investors, can we use this foolishly? Well, first of all, as a certified financial planner, I've never suggested, like, clients buy stock a week before the end of the year and sell the first week of January to take advantage of a Santa Claus rally. I don't do anything like that. And you're absolutely right. You hit the nail on the head with that 2021 example is that these are rules of thumb that

work until they don't. And when they don't, you can miss out. on a lot. You know, the sell in May and go away in 2021 didn't really work out very well, if I'm remembering my calendar correctly. But the market has an upward bias over time. If you look at any calendar period, anyone, you know, the first two weeks of September or the last three weeks of October, whatever the calendar period may be, if you look at the market's history, it's more likely than not to go up over any period of time because the market has a long-term upside bias. So that's really the key takeaway here is that none of these percentages,

whatever time period, are going to be below 50%. And so it's always a good idea to be invested, whatever time of year it is, or whatever you think the market's going to do, or whatever some indicator says it's going to do for the rest of the year. Yeah, I love that. Basically, what we're saying here is the historical takeaway is that stocks go up most of the time. So don't worry about the market conditions so much as identifying those high-quality businesses that you can buy and hold for the long term. I love it. Thank you, Matt. That's going to end that segment. And coming up, we're going to talk about some Tesla financial results. You're listening to Motley Full Money. If you're early in your career and looking for insight, inspiration, and honest

advice, listen to the Capital Ideas podcast, hear from Capital Group professionals about leaning into the differences that make you unique, making decisions that last, and what it means to lead with purpose. The Capital Ideas podcast from Capital Group, available wherever you listen. published by Capital Client Group, Inc. Okay, so Tesla just reported yesterday evening. We're taping this on Thursday, October 23rd. Yesterday, the Tesla numbers came out. And Matt, I just want to ask you just simply, what stood out to you?

The Stocks Downs, spoiler alert, after earnings. So the headline story is that Tesla return to growth. They produced 12% revenue growth year every year after two straight quarters of declines. That sounds great on the surface. I wonder how much of this, which clearly a lot of it, had to do with the pending expiration of the EB tax credit, which expired in September 30th. In full disclosure, my wife and I bought our first electric vehicle about three days before that because the tax credits were about to expire. So a lot of sales were pulled forward. Besides, that earnings didn't miss expectations.

And when you combine an earnings miss with a revenue beat, it generally indicates worse than expected margins, which is the case here. And in the earnings call, it's revealed that the full self-driving system, which is, I mean, that's one of Tesla's big strengths. Only 12% of customers are paying for it, which is a lot lower than a lot of people expected to hear. And they spent most of the call talking about what they're going to do next year, build the cybercabs, start doing the semi-truck. They're releasing their next generational battery storage system.

Tesla has a strong history of producing great products after they say they were going to, like a year or two late. So investors are less than convinced. buy these earnings is kind of my big takeaway. Yeah, I want to circle back to something you just said there regarding the profit margins. And so Tesla's operating margin has dropped in 10 of the last 11 quarters. I think that that's a noteworthy trend at this point. And when you think about, okay, why would profit margins be going down? There is one thing that stood out here on the income statement. through the first three quarters of the year, R&D spending is up 42% year over year for Tesla.

And so that is one expense that's rising. And in the call, they attribute at least some of it. It had to have been a significant portion of this R&D spend to the people who are working on AI. And so Tesla is trying to be a leader in artificial intelligence, and it makes sense. It really does need it for the full self-driving. It needs it for the optimist robot plans. So it definitely wants to be a leader in AI. So that spending is up.

but also these regulatory credit revenue, right? This stream is coming down. It was down 44% year over year in the third quarter. And looking through the financial report, it says it only expects $877 million in the regulatory credits over the next 12 months. Now, just for perspective, over the last three full years, it's generated credit revenue of $2.8 billion, $1.8 billion, and $1.8 billion in 2024, 2023, 2022, respectively. So expecting less than a billion over the next 12 months, that's actually quite a significant downtrend,

and it's going to continue on. I believe it's 2027. They expect no regulatory credit revenue. And this is basically pure profit. So it's consequential to the business. Yeah, and you mentioned that operating margin. A big factor of that, too, has to do with those EV credits expiring. Tesla's average sale price has declined significantly.

People are buying the less expensive cars because if you're not familiar, the credit was capped by the vehicle price. For an SUV, it couldn't be more than, I think, $85,000. For a sedan, it was a lot less than that. So people were buying the cheaper models to take advantage of the credits. And those are the lower margin models. Tesla makes higher margins on like a Model S or a model X is the big SUV. But a lot of those don't qualify for the credits. So I'm really curious to see how things roll out in the fourth quarter when they're unassisted by tax breaks. and that especially when so many other automakers, like we didn't buy a Tesla, we bought a GM vehicle,

so many other automakers are rolling out so many new EV models that are very competitive. Yeah, I think that's a really good thing for our listeners to be watching for. How does that business hold up now as the whole credit scene is changing and that really does change some of the dynamics of electric vehicles? But also, hey, keep an eye on what the company is doing with its newer initiatives because it's definitely ramping up the spending

on the R&D to have those payoffs. So we'll see how that plays out in coming quarters. After the break, we're going to talk stocks on our radar with a little bit of a twist. The old adage goes, it isn't what you say, it's how you say it, because to truly make an impact, you need to set an example and take the lead. You have to adapt to whatever comes your way. When you're that driven, you drive an equally determined vehicle, the Range Rover Sport. The Range Rover Sport blends power, poise, and performance. Its design is distinctly British and free from unnecessary details, allowing its raw agility to shine through. It combines a dynamic sporting personality with elegance to deliver a truly instinctive drive.

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Okay, so it's Thursday, the Thursday podcast, and we usually hit some stocks on our radar. And I thought, Matt, this would be fun just to do it a little bit differently. I saw a report that showed that counterintuitively stocks that were dropped from the S&P 500 actually wind up outperforming the S&P 500 over the next five years. And that's kind of, you wouldn't expect that. You would think that a stock that was dropped is on its way down and a decline.

But, you know, showing that maybe after all the indexes have rebalanced and all that selling pressure is done, these companies actually wind up doing kind of well. And so I thought it'd be fun. You and I would pick one stock that's been dropped in the last 18 months and say, hey, this is our pick that's going to outperform over the next five years. And I'll go first here. I think Etsy. So Etsy was dropped in 2024. I'll tell you what I don't like. I don't like that the buyer growth peaked a few years ago.

I don't like that revenue is barely climbing right now, but this is a business that still generates over $600 million in free cash flow. It trades it just 14 times its free cash flow. And because it's generating cash and it's cheap, it's actually reduced its share count with stock buybacks by about 20% or by over 20% in the last few years. So this is kind of interesting. Shares are already up 40% in 2025, so I think it's already bottomed out. And, you know, the company just integrated with ChatGPT,

I think that this may be a way that Etsy can actually start finding some new user growth again by having that integration with a huge user base at ChatGPT. And so if this is something that can help accelerate the growth, the revenue growth of the company, on top of it already being cheap and already buying back shares, This is something that I think can boost the stock price in coming years. So speaking of Etsy's stock price, we bought shares of Etsy and my wife's IRA years ago, right around when Amazon was launching Amazon handmade and the stock cratered because everyone thought it was going to die.

So our cost space is about $6 a share. It's more than 10x from there, even after the big slump. So my wife gets to claim the title of Best Stock Picker in the house because for Etsy's a 10-bagger. But on the chat GPT thing, I think that's a really interesting development because they're not the only ones partnering with OpenAI to offer AI powered shopping. Shopify is rolling it out to all of their merchants who want it. And that's a big deal. But Etsy is unique in the sense that there's a ton of potential for AI-driven shopping for a company whose specialty is unique in handmade goods. People who have absolutely no artistic ability like myself, if I want something

custom, AI could be a great way to help me find what I want. And there's just a a lot of different implications for that technology with a business like Etsy. So out of all the companies, it's not just Shopify, there are others, too, that have announced that they're going to partner with Etsy. I think Walmart might be one of them with OpenAI. Etsy is the one that I'm most excited about and I think has the most potential. But as far as the stock that's on my radar, the list was really interesting. And I had to dig in because some of these have been removed from the S&P 500 because they

don't exist, Discover Financial being one of them. It was acquired by Capital One. so the stock doesn't exist. It can't be in the S&P 500. But what that does exist and was actually moved all the way down from the S&P 500 to the S&P small cap 600 because of a dramatic fall on its price was N-phase energy, ticker symbol E-N-P-H. I see why it's down. It's a bad time cyclically for solar. The current political and regulatory environments aren't exactly solar-friendly. The company's international growth has been impressive. They've made some really smart pivots like moving a lot of their component production to the U.S.

And the company's innovation does remain very strong. There's a big long-term opportunity here in solar and for Enphase in general. And while this stock could be a roller coaster ride for a while, I think investors who get in here could have a long-term winner on their hands. Love it. Etsy, Enphase Energy. Some good thoughts here for beating the market over the next five years. But that's all the time that we have for today.

You'll want to tune in tomorrow for Travis Hoyum, Lou Whiteman, and Jason Hall. They'll be talking about the recent cloud outages, Apple's iPhone growth, among some other things. But let's go ahead and hit the disclosure before we close out. As always, people on the program may have interest in the stocks they talk about, and the Motley Fool may have formal recommendations for or against. So don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes.

only. To see our full advertising disclosure, please check out our show notes. Thanks to our producer today, Bart Shannon, for keeping us on schedule. For Matt Frankel and myself, thank you so much for listening. And until next time, fool on.