Something unusual happened when the market finally started trading Tesla shares after the release of its quarterly results after the bell on Wednesday.
Typically, these stocks sell off on good news as investors profit from their bets until they make a profit. This time it actually increased, seeing the percentage gain double in yesterday’s session.
All told, Tesla has risen more than 50% since hitting a two-year low on the first trading day of 2023—a staggering pace that has helped mute recent calls to buy back shares.
Tesla is oversold
The stock had been on a downward slide in December as investors took advantage of tax losses before the year closed. When December began, Tesla was still trading just shy of $200, with Morgan Stanley later predicting the risk of a bear case of $150. But it fell even further and finally marked a low below $102 in early January.
So Tesla stock is due for at least a near-term rebound as bearish bets aren’t thrown out and investors are holding the stock at some of the best valuation levels Tesla has seen in years. Importantly, one of the most important contributors to the recent downward pressure on the stock has been Musk himself, and he pledged late last month not to sell any of his own stock this year.
The growth of the narrative is intact
Tesla is very confident that it can reach 1.8 million vehicle sales by 2023—a Goldilocks-like prediction that is considered too optimistic because it is unrealistic due to recession concerns, or even pessimism. While shy of the annual growth rate of 50% compared to the volume of 1.3 million last year, it is still in the long-term growth trend predicted in 2020.
Additionally, Musk said it was a cautious target based on last year’s painful experience with China’s unwanted lockdown. In a normal environment, he believes 2 million will be possible this year. And the important thing is that without the volume production of the Cybertruck, which Musk said on Wednesday is first scheduled for 2024.
Profitability is afraid of falling
The big fear among investors is the consequences of the severe price cuts on Tesla’s margins.
However, CFO Zach Kirkhorn downplayed those concerns when asked during a call that automotive gross profit will fall below 20% this year. He replied that investors should not be afraid, because many of the new cars delivered have been at a lower price point since the beginning and they still managed to generate a margin of 25.9% in the last quarter (although it increased slightly due to the profit of $324 million from FSD revenue .recognition).
Furthermore, he made it clear that he expects Tesla’s component suppliers to reduce the cost of their goods.
Optimism Investor Day
Tesla surprised at the beginning of this month with the news of the investor day in March, which has not been in this form at the beginning of the year since Tesla Autonomy Investor Day in April 2019. There, the automaker is expected to reveal details about the new platform that will support the entry compact car under Model 3.
Many investors worry Tesla doesn’t have an answer to China’s ultra-affordable EVs like the BYD Dolphin and Wuling Hongguang Mini. Tesla’s competitor, dubbed the Model 2, will eventually solve this problem, while also experiencing an increase in production costs. This potential volume is the main driver of long-term value.
Less Twitter drama
Remember when Musk was there tweet “My personal pronoun is Prosecute/Fauci”? The polarizing entrepreneur is making non-stop headlines as he increasingly compliments alt-right headlines. The overhang from the Tesla stock sale to fund Twitter has been a major contributor to bearish sentiment.
While Twitter is still seen as critical, Musk said on Wednesday that his personal account remains the driving force behind the Tesla brand thanks to his 127 million followers. He has also appeared less eager to court controversy in recent days, stifling calls in December for Musk to either appoint a full-time head of Twitter or step down as CEO of Tesla.
A new income stream
Musk may be trying to rebrand Tesla as an AI company with Full Self-Driving (FSD) software as the linchpin behind its efforts, but the key catalyst of the stock has always been plain vanilla car sales. That may eventually change.
Although FSD is still in beta, Tesla’s energy storage business is starting to generate meaningful growth. Chief financial officer Kirkhorn confirmed that it will not only go beyond the vehicle business, but that it is important that his team is now focused on managing the income statement towards the overall operating margin target for the entire company, not just automotive – a clear sign that Tesla is starting to have a more diversified earnings base.
But stay alert…
The market has been here before. Call Q3 was outlandishly bullish, with Musk predicting in October as “epic” the end of the year-but what happened as a revision of earnings down clearly by Wall Street as a problem mounted, in China especially. Only then can Tesla clear the bar of Wednesday’s earnings expectations.
This month’s steep price cuts helped ensure Tesla would get more vehicles for Joe Biden’s federal EV tax credits under the Inflation Reduction Act, but it points to a clear demand problem as inventory grows.
Musk insisted on Wednesday that January orders are historically high and doubling the rate at which he can produce cars is also only a snapshot in time. This is unlikely to be sustainable if several waves of demand subside.
Finally Tesla is a momentum stock. Musk’s company is one of the most likely to see sharp swings in every direction because of its huge appeal among options traders. No individual company has a higher volume of leaps, calls and trades per day, regularly outpacing other megacaps like Apple, Amazon and Nvidia. These derivative contracts offer a low-cost but high-risk means of driving disproportionate movements in the underlying stock price through trading strategies like gamma squeeze.
In other words, Tesla could easily reverse course and enter another roller-coaster phase of downward pressure, so be careful.
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