Will Tesla’s Q4 results reflect its long-term investor optimism?

Tesla lost $675bn in market valuation in 2022, the worst year in its stock history. It was the same year the EV maker’s CEO acquired Twitter. However, the reasons for the decline ran much deeper than Musk’s problematic involvement in the social media company. What will they mean for Tesla’s upcoming earnings?

- Tesla entered a pricing war with rival EV makers, slashing 20% off the price tags of its best-selling models.

- Tesla and CEO Elon Musk have been under fire recently over various malpractices and trading misconduct.

- Investors are buying the dip in Tesla shares, indicating longer term optimism for the stock.

Pricing wars

Tesla Inc. [TSLA] recently cut the prices of its most popular models in the US, as much as 20% from the price of some versions of the best-selling Model Y earlier this year, drawing mixed reactions from Wall Street analysts and investors. Some believe it’s a strategy to crush competition by giving up some of its operating profit margin, which is larger than most car companies, while simultaneously qualifying several models for a $7,500 federal tax credit. Others see it as a response to the EV maker’s declining demand.

However, analysts are unanimous that the pricing move has stirred the EV industry, with competitors including Chinese EV maker Xpeng Inc. [XPEV] retaliating with reduced prices and new “fastest-charging” models in attempts to convince buyers and investors that they are still feasible Tesla alternatives. Meanwhile, Tesla sales in China surged in reaction to the price slash, with average daily sales between 9 January and 15 January surging 76% from the same period a year ago, according to data compiled by China Merchants Bank International (CMBI).

Musk under fire over trading misconduct

Musk is currently on trial for a securities-fraud lawsuit relating to a tweet in August 2018 about taking Tesla private. Investors sued arguing that he lied about having “funding secured” and incurred big losses when the plan fell through. Musk retorted saying Saudi investors said they would back him but backpedalled. Musk’s public wealth spiked by $10.6bn, however, since taking the stand, according to the Bloomberg Billionaire Index.

Separately, questions regarding possible insider trading have been raised over the timing of Musk’s sale of nearly $3.6 bn worth of Tesla shares that came soon after a wave of reports highlighting a drop in demand for the company’s vehicles, and soon before Tesla revealed on 2 January that its Q4 deliveries fell notably short of the company’s investor guidance. This sent the Tesla share price tumbling the next day as markets opened.  

Tesla has also been accused of false advertising. Ashok Elluswamy, director of Autopilot software at Tesla, testified that a 2016 video advertising Tesla’s self-driving technology was staged to showcase capabilities that it did not possess, such as stopping at red lights and accelerating at green lights.

Investors seem bullish for the long run

Investors, who appear to have tired of buying the dip with plummeting tech stocks, are still actively grabbing Tesla shares. According to Vanda Research, they have invested more money in Tesla shares over the last six months than they did in the last five years. Despite a range of lawsuits, demand problems, manufacturing issues, and Musk’s divided attention following the Twitter Inc. takeover, Tesla’s supporters remain confident on a long-term payout. One-day net purchases of Tesla shares reached a record high of $316m on 10 January.

Fund in focus: Global X Autonomous & Electric Vehicles ETF

The KraneShares Electric Vehicles & Future Mobility ETF [KARS] holds a 3.1% weighting of Tesla, which is among its top ten holdings. The fund was up 13.16% in the last month and fell 24.58% year-over-year. Rather than focusing on EV-specialised companies, the ETF provides exposure to a variety of companies that work on different aspects related to the EV sector.

The Global X Autonomous & Electric Vehicles ETF offers more direct exposure to EV companies and includes a 1.69% holding of Tesla shares. The fund was up 11.67% in the last month.