Tesla shares are up a whopping 60 percent in the past month after recording a loss of around 70 percent in 2022. At the heart of this recent outperformance lies investors’ confidence in Tesla’s ability to successfully navigate the ongoing weakness in the auto sector, with the company’s Q4 2022 earnings providing much-needed clarity on the EV giant’s gross margin safety net.
As we’ve continued to note over the past few months, Tesla has cut the prices of its EVs between 6 and 20 percent in key markets to counter softening demand, essentially relying on its industry-leading margins to cushion the impact of these discounts on its bottom-line metric.
While Tesla’s automotive gross margin declined by 7 percent on a sequential basis in Q4 2022, the company reiterated its overarching goal of registering a 50 percent long-term CAGR on its annual deliveries. Even so, the company’s 2023 production target of 1.8 million vehicles only corresponds to a year-over-year growth of 37 percent.
$TSLA 4Q conf call was excellent (+5% AH):
– Reiterated goal of 50% L/T prod’n growth while resetting 2023 vol expectation at 1.8M.
– Shared that Jan orders so far were 2x production capacity
– Cytruck on track for late 2023 intro
– 2023 GM% ex-RC should exceed 20% and ASP >$47K.
— Gary Black (@garyblack00) January 25, 2023
The real stimulus for Tesla bulls, however, came during the company’s earnings call. To wit, the EV giant disclosed that the orders for the month of January were running at around 2x its production capacity. Moreover, the company believes that it can prevent a drastic reduction in its automotive gross margin by eking out additional cost-savings and production efficiency gains. Consequently, Tesla expects its automotive gross margin (after regulatory credits) to remain above 20 percent in 2023, with an ASP of over $47,000. This, predictably, supercharged the company’s bulls.
Source: Market Chameleon
Meanwhile, as an illustration of the growing bullishness around Tesla shares, consider the fact that the 30-day implied volatility skew for 25-delta puts and calls is currently hovering around levels last seen in August 2022, when the stock was undergoing a vicious bull run. For the uninitiated, 25-delta puts and calls have a roughly even chance of expiring in the money. The IV skew measures the difference in the implied volatility of puts and calls. As a rule, the greater the implied volatility of an options contract, the greater its demand, with all else equal.
Going forward, the fate of the ongoing bull run in Tesla shares will be determined after the conclusion of the upcoming FOMC meeting. Should the Federal Reserve decide to double down on its hawkish stance to tame the ongoing easing in financial conditions, readers should expect this rally to come to a grinding halt.
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