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Education Series: Single-Stock ETPs

Who is driving Tesla?

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Websim is the retail division of Intermonte, the primary intermediary of the Italian stock exchange for institutional investors. Leverage Shares often features in its speculative analysis based on macros/fundamentals. However, the information is published in Italian. To provide better information for our non-Italian investors, we bring to you a quick translation of the analysis they present to Italian retail investors. To ensure rapid delivery, text in the charts will not be translated. The views expressed here are of Websim. Leverage Shares in no way endorses these views. If you are unsure about the suitability of an investment, please seek financial advice. View the original at

The question of who is guiding the direction of Tesla’s stock performance has been a subject of much debate. It could be argued that, much like a Tesla vehicle, the stock is on autopilot with its CEO, Elon Musk, simultaneously steering a number of other ventures such as Twitter, SpaceX, and Tesla. In 2022, Tesla experienced a difficult year as its share price dropped 65%. This decline removed the company from the exclusive trillion-dollar valuation club and also caused it to lose its position as the fifth-largest company on the S&P 500 Index.

However, 2023 has proven to be a different picture altogether, not only the stock has bounced back, to some degree, helped by the top and bottom lines beats in its Q4 2022 financial report, in addition to that its enigmatic CEO hyped up investors that Tesla might produce a whopping 2 million cars this year.

In the fourth quarter, Tesla’s delivery figures contributed to the highest quarterly revenue of $24.3 billion. The company reported automotive revenue of $21.3 billion, a 33% increase from the same period the previous year. However, there is ongoing concern about the company’s margins due to its recent price cuts, which had a negative impact on the Automotive Gross Margin and Total Gross Margin, as seen in the company’s Q4 financial results.

If we look under the surface, however, one of the reasons why tesla barely was able to beat its bottom line, is mainly because, prior to the release of its latest quarterly report, earnings expectations were massively revised downward in the last couple of weeks.

Tesla has reported that its vehicle deliveries reached 1.31m over 2022, marking a 40% jump in deliveries compared to last year, best year in terms of total deliveries.

Despite reporting impressive annual growth in vehicle deliveries, the significant decline in its stock performance last year can be blamed on the overpromising and underdelivering game that Musk has been playing with his investors.

Hyping up investors’ expectations, by targeting 50% growth rate, and then failing to meet them, by achieving only 40%, is like a pin that meets a balloon causing substantial cracks the Tesla’s growth narrative.

This decline in stock price last year can also be attributed to several other factors, including growing competition in the EV market both in the US and China, continued supply chain issues, broader economic downturn. Shortages of semiconductors and other materials kept auto industry production down, allowing companies across the industry to focus on higher-margin models and book strong profits, even as sales volumes fell. These factors have put pressure on the company’s sales, leading to a shrinking backlog, a sign that future demand is weakening.

In response to these challenges, Tesla has announced that it will be cutting prices on its electric vehicles. It started off first in China at the end of last year and in 2023 the price cuts followed in the U.S. and Europe. The move aimed at boosting sales by driving volume growth. With the drop in prices ranging from 6% to 20% in the U.S., effectively allows more Tesla models to be eligible for newly revised tax incentives of $7,500 that kicked in January 1st under the Inflation Reduction Act.

However, the price cuts can be seen also as a sign of strength – a display of pricing power and cost superiority. Tesla brought battery manufacturing and other parts of its supply chain in-house, and standardized vehicle designs to improve economies of scale. Hence, it comes as no surprise that they are achieving economies of scale here by being the most effective on the “net profit per vehicle” metric.

Lastly, do not get too optimistic about the stock, Tesla might have driven some demand, but it will be at the expense of its future margin compression.

On top of that, lots of macro headwinds are blowing into the market face, which seems rather complacent for now, as can be seen in this article , amid the gloomy earnings outlook. Perhaps the earnings do not yet fully reflect the possible risks and challenges that may arise from a potential recession, only pricing in a “soft landing” scenario.

As the Earnings per share (EPS) downgrades continue to make headlines, the extend of which is in line with recessionary years (red circles). Traditionally, as earnings fall, the price is the next, metric to fall in line.

In summary, Tesla’s financial performance may be relatively resilient during a recession, but it is not completely immune to economic downturns. Despite being a leader in the electric vehicle market, Tesla’s aggressive price cuts are a double-edged sword. While it may increase demand, it will worsen its future profitability. Given where we are in the current cycle, slowing global economy and rising interest rates, investors may be hesitant to give Tesla the necessary boost for the company to achieve its target of 50% growth rate that Elon Musk’s growth story is based on.

Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.

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Sandeep Rao

Research

Sandeep joined Leverage Shares in September 2020. He leads research on existing and new product lines, asset classes, and strategies, with special emphasis on analysis of recent events and developments.

Sandeep has longstanding experience with financial markets. Starting with a Chicago-based hedge fund as a financial engineer, his career has spanned a variety of domains and organizations over a course of 8 years – from Barclays Capital’s Prime Services Division to (most recently) Nasdaq’s Index Research Team.

Sandeep holds an M.S. in Finance as well as an MBA from Illinois Institute of Technology Chicago.

Violeta Todorova

Senior Research

Violeta joined Leverage Shares in September 2022. She is responsible for conducting technical analysis, macro and equity research, providing valuable insights to help shape investment strategies for clients.

Prior to joining LS, Violeta worked at several high-profile investment firms in Australia, such as Tollhurst and Morgans Financial where she spent the past 12 years of her career.

Violeta is a certified market technician from the Australian Technical Analysts Association and holds a Post Graduate Diploma of Applied Finance and Investment from Kaplan Professional (FINSIA), Australia, where she was a lecturer for a number of years.

Julian Manoilov

Senior Analyst

Julian joined Leverage Shares in 2018 as part of the company’s premier expansion in Eastern Europe. He is responsible for web content and raising brand awareness.

Julian has been academically involved with economics, psychology, sociology, European politics & linguistics. He has experience in business development and marketing through business ventures of his own.

For Julian, Leverage Shares is an innovator in the field of finance & fintech, and he always looks forward with excitement to share the next big news with investors in the UK & Europe.

Oktay Kavrak

Director

Oktay joined Leverage Shares in late 2019. He is responsible for driving business growth by maintaining key relationships and developing sales activity across English-speaking markets.

He joined LS from UniCredit, where he was a corporate relationship manager for multinationals. His previous experience is in corporate finance and fund administration at firms like IBM Bulgaria and DeGiro / FundShare.

Oktay holds a BA in Finance & Accounting and a post-graduate certificate in Entrepreneurship from Babson College. He is also a CFA charterholder.

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