Tesla, Inc. (NASDAQ: TSLA) caught investor attention by announcing further price cuts for their lucrative electric vehicles in a controversial move amid the ongoing price war among electric automakers. By gearing down in response to a slowdown in demand, investors are weighing their options. Is it time to take a pit stop, or will investors continue to tag along the Tesla growth ride?
With earnings season nearing, Tesla investors will count the days until they get an insight into the financial health of the automobile giant. The company is due to release its Q1 2023 results next week Wednesday, with a focus on its margins amid the recent slur of price cuts. With sentiment around a potential recession, the company might need a solid report to keep investors convinced in tumultuous economic conditions that generally do not favour the industry.
Technical
Since August 2022, Tesla’s shares have fallen an astounding 66% toward an early January bottom at $101.60. Since then, optimism has returned as the company joined the growth stock outperformance to recover some losses. Currently, the stock is trading at $180.54, close to the 38.2% Fibonacci retracement at $183.71. The bears are threatening a breakdown of the symmetrical triangle. If the earnings support their views, a move toward $152.76 is on the cards for a significant downturn amid the adverse economic backdrop.
However, if the earnings can convince investors of the company’s financial resilience, the share price could continue trading in the triangle, where resistance may be met at the Fibonacci midpoint of $208.72. From there, a move toward the estimated fair value of $217.95 on a discounted cash flow basis is possible, posing a potential 21% upside from current levels.
Fundamental
In the opening months of 2023, Tesla announced a series of price cuts on their electric vehicles. In January, price cuts in China and Asia were followed by a second round of cuts in Europe. Their Model S and Model X prices underwent another round of cuts in March. As the price war continued amid a slowdown in demand, Tesla further announced price cuts for all their US vehicles in April. Their Model S and Model X vehicles saw a price cut of $5,000 to a starting price of $84,990 and $94,990, respectively. Their Model 3 price was cut by $1,000 toward $41,990, while their Model Y got cut by $2,000 toward a starting price of $49,990.
These cuts came ahead of new battery and mineral component requirements by the Biden Administration to qualify for the $7,500 Inflation Reduction Act tax credit in an attempt to maintain demand for their vehicles. The new requirements state that vehicles should contain batteries with specific components and critical minerals sourced from North America and the US. The initial rounds of price cuts contributed to record first-quarter deliveries of 422,875, up 36% from the year-ago period. However, analysts expected 432,000 as production levels hit 440,808, signalling an imbalance between output and sales. With demand for discretionary items declining, analysts are not too optimistic about next week’s earnings release.
With earnings looming, analysts expect earnings per share of $0.86 on revenue of $23.8Bn. This compares to the year-ago period’s earnings per share of $1.07 on $18.8Bn revenue. However, the focus will be on their margins, as recent price cuts have raised concerns over their profitability. In the previous quarter, they reported a 16% operating margin on a gross margin of 23.8%. These metrics could be critical in investors’ sentiment surrounding their health as we advance.
However, margins are not the only risk to Tesla’s operations. As a high-beta stock, the company is generally more volatile than the broader market, posing a significant risk if the economy enters a recession in the latter parts of the year. The graph below shows Tesla’s sensitivity to the macroeconomic cycle in the fact that minor downturns in the S&P 500 often turn over into major contractions for the company’s stock price.
Though this is an industry concern for the discretionary sector, Tesla’s beta has historically been higher than its competitors. Compared to other automakers like Ford, General Motors and Mercedes Benz, the company is more levered to the effects of the economic cycle, as seen in the beta comparison below.
However, Tesla has grown significantly in improving their cash flow generation while maintaining the health of their balance sheet. The graph below shows the major players in the discretionary sector in the US. Comparing their free cash flow and net debt places Tesla in a relatively healthy position. They generate large cash flows on a significantly lower net debt than competitors like Ford and General Motors.
Furthermore, Tesla is constantly looking for new opportunities to expand. With their new Cybertruck set to hit the market in 2023, their top line should see some growth in the latter parts of the year and into 2024, when mass production on this new Model is set to start. They have also announced the production of a new facility in Shanghai to produce its megapack battery units. With their energy storage unit growing at an increasing pace, this new facility could aid in generating additional revenue apart from their automobile sales.
Summary
It is no secret that Tesla faces multiple headwinds heading into their earnings release next week. With margin pressures increasing amid a potential US recession, the company’s earnings could be pivotal in its fundamental outlook. If their earnings report is strong, reflecting a robust bottom line despite increasing headwinds, they could unlock the value needed to converge to their estimated fair value of $217.95.
Sources: Koyfin, Tradingview, Reuters, Investor’s Business Daily, Yahoo Finance, Tesla, Inc.
