Tesla Earnings Reaction: The Road to $89

The hope for the Federal Reserve to orchestrate a soft landing is waning as the Earnings Season gets into the thick of it. Tesla stock took 36 days to drop like a rock -48% from December ’22 to January ’23. Cut in half in just over a month!! Since then, recovering by about 42% but guiding earnings lower could send this bad boy on another leg down. Just breaking support at the August ’20 Low ($91) would be about -37% lower from current levels. So what could take Tesla stock lower?

Daily Chart provided by TradingView of Tesla Stock showing the -48% falloff described in the paragraph above.

Major Headwinds

In 2023, Tesla continues in a downtrend after its worst year due to slowing growth in China (COVID-Zero impact) and Musk’s Twitter folly. That $42 Billon deal caused him to sell billions in shares destroying shareholder sentiment. Even further, CEO Elon Musk now involved in a lawsuit defending his 2018 tweets regarding plans to take his company private… Pick your poison. 

The macroeconomic environment globally is a major headwind to be honest. Weakening day-after-day as recession fears continue. Demand Softening from higher Inflation (6.5%) and Unemployment (3.5%) is met with cost cuts. The borrowing costs haven’t been this high since 2007. This makes it more expensive for people to buy cars and decrease spending overall. Bad news for Tesla! Guess why the company cut prices on top-sellers, Model 3 and Model Y, up to 20% creating pressure on profitability. U.S. customers can even claim a federal tax credit worth $7,500 in 2023 which should solidify market share dominance in a tough environment. We shall see!

Where’s the Value?

The Top Automakers industry average P/E Ratio (TTM) is 10.1, while Tesla’s is 41.35. That’s expensive! Forward P/E is 27.7x nonetheless. A Drawdown to $89 would imply a P/E Ratio (TTM) of 25.57x. Still at a premium to the market currently at 20.89x and with a healthier growth story. I believe that it will still maintain a premium valuation versus the industry but Musk will have to name a CEO of Twitter, provide accurate guidance on earnings, and hold his promise to not sell anymore stock for the foreseeable future. It is important to understand these implications in order to make informed decisions in an ever-changing economic landscape.

Q4 2022 Earnings Reaction

Today, Tesla’s Earnings report released. Announcing record revenue at $24.32 Billion and beat on earnings of $1.19/share. However, automotive gross margins were reported to have come in lower at 25.9%, the lowest figure in the last five quarters. The company forecasting 1.8 Billion Vehicle Deliveries for FY2023 versus 1.3 Billion FY2022. Remember I said Tesla needed to provide accurate guidance? Well, that’s only about 38% growth despite guiding to 50% for the full year. If the company senses demand waning, for reasons we spoke about at the beginning of this article, then that could result in the company cutting guidance further and send the stock lower. Buyer beware!

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