Elon Musk's Tesla Confronts 'Black Cloud': Q4 Earnings Must Draw 'Line In The Sand Around Margins,' Analyst Says

With Tesla Inc TSLA set to report its fourth-quarter earnings on Wednesday, the key item for many will be guidance on its margin and demand outlook over the next year given the balance the company had to strike in 2023 with price cuts.

Analysts at Wedbush said that price cuts in 2023 were the right move to ensure healthy demand given increasing competition and higher production rates.

However, they questioned whether the Elon Musk-led electric vehicle maker can continue its cost-cutting strategies, or if it will opt to keep its current pricing to ensure margin stability amid possible declines in EV demand.

“Which pricing path Tesla takes will be a foundational move for the future of Tesla over the coming years in our view,” said analyst Daniel Ives.

Wedbush kept its outperform rating on Tesla stock and maintained a $350 price target.

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Margin Decline

Ives said that while the long-term bull thesis for Tesla was built around its disruptive technology — its supercharger network, battery advancements and artificial intelligence — if more price cuts are announced, margins could decline further.

“This would make it difficult for the stock to shed this black cloud in the near-term,” said Ives.

Tesla shares gained strongly in 2023, more than doubling in price, despite being one of the year’s most shorted stocks by hedge funds and other investors betting on share price losses.

Since the turn of the year, however, the shares have fallen by nearly 15%.

Most Shorted Stock In 2023

Recent data from S3 Partners shows that after Apple and Microsoft, Tesla is the third-most shorted stock on the S&P 500, with short interest totaling $18.5 billion.

In 2023, this stock was paradoxically the most shorted yet the least profitable for short sellers. However, recent data indicates a significant drop in short interest over the past month, decreasing by nearly $2 billion.

“We still anticipate Tesla to maintain its long term 50% unit growth which is more procedural at this point rather than true guidance for the coming year,” said Ives.

He added that the company’s third-quarter conference call left Tesla bulls with many unanswered questions, and that uncertainty had been an overhang on the stock since late October.

“The line in the sand around margins must be drawn on Wednesday to give investors the hittable bogeys and targets for 2024 and then start the next phase of the Tesla growth story through this near term period of supply glut and uncertainty for EVs,” Ives noted.

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