Tesla Needs A Narrative Change

Over the last four weeks, one of the biggest losers in the stock market has been Tesla, Inc. (NASDAQ:TSLA). After nearly climbing back over $300, shares of the electric vehicle giant have lost more than $225 billion in market cap. While one of the reasons for the fall came out of the blue, there are some self-inflicted wounds that have investors selling right now. Today, I want to look at why shares have dropped and what Tesla needs to do to get shares going again.

Last week, investors woke up to a surprise on Monday morning when an 8-K filing from the company detailed that CFO Zach Kirkhorn was leaving. Although he is expected to continue his service towards the company until the end of the year, he was out of his position a few days before the filing. There were some concerns about the lack of clarity in the filing, as it didn't state a reason for leaving, and didn't contain usual executive or board member departure language such as "his leaving is not due to any dispute or disagreement with the company."

It remains to be seen if he was leaving for another opportunity elsewhere, or as some skeptics wonder, perhaps he was fired or had a disagreement with CEO Elon Musk. At the same time, Elon Musk has seemed fixated on a potential cage match with Meta Platforms (META) CEO Mark Zuckerberg, with the two leaders trading shots on social media in recent weeks. Tesla investors see this as another distraction taking away focus from the EV company, just like with SpaceX and Twitter (Or "X" now). This concern was amplified with the CFO departure, as many considered Zach to be the true adult in the room that was really running the Tesla ship and could have been the next CEO.

One of the biggest concerns regarding Tesla throughout 2023 so far has been price cuts. The company started the year with some major slashing of prices across the board and around the globe, and numerous reductions have taken place since. Bulls were hoping that price cuts had mostly stopped by the end of Q2, which would allow automotive gross margins to stabilize and perhaps rise again. However, Tesla has announced this week more Model Y price cuts in China as well as new cheaper versions of the Model S and X. After a slight tick up in 2023 EPS estimates throughout the latter part of the spring, the current value of $3.45 is basically a new low and down more than 40% from pre-Christmas 2022 levels as seen in the chart below.

With the pandemic pretty much in the rear view mirror, Tesla's sharp rise in deliveries last year led to a surge in profits as well as cash flow. The company has been able to significantly reduce the amount of debt on its balance sheet, while still being able to invest billions in current and future growth efforts. With a large net cash position, Tesla has shifted some of those funds to short-term investments that are earning some nice interest income thanks to the sharp rise in interest rates.

However, as we approach the two-thirds mark of the calendar year, one of the catalysts that the bull camp was looking for in 2023 has yet to materialize. Investors have been looking for Tesla to start repurchasing its own shares. This might not end up reducing the overall outstanding share count, but at least would offset some of the massive dilution that's been ongoing over the years. On last year's Q3 conference call, Elon Musk made the following statement that all but guaranteed a buyback was coming, so the lack of an announcement so far hasn't helped overall sentiment.

Based on many -- what people -- based on many things, but certainly questions I get on Twitter about buybacks. And I think every one of our Board members has gotten questions about buybacks. We’ve debated the buyback idea extensively at the Board level. The Board generally thinks that it makes sense to do a buyback. But we want to work through the right process to do a buyback, but it’s certainly possible for us to do a buyback on the order of $5 billion to $10 billion, even in the downside scenario next year, even -- given if next year is a very difficult year, we still have the ability to do a $5 billion to $10 billion buyback. This is obviously pending Board review and approval. So, it’s likely that we’ll do some meaningful buyback.

As a result of the recent selling, Tesla shares find themselves in an interesting place. The stock is now about $20 under the average price target on the street, something we haven't seen in about three months. Also, as the chart below shows, the stock recently lost its 50-day moving average (purple line) for the first time since April. The last time that happened back in April, shares ending up falling below their 100-day moving average (orange line) as well, and we're still about $10 above that line currently.

It doesn't help the stock that the overall market has been under some pressure recently. Rising bond yields pressure growth companies like this that trade at high valuations. Tesla currently trades at more than 47 times expected 2024 adjusted EPS, which is at least double what a normal S&P 500 name trades at, and several times that of traditional automakers. The potential for more rate hikes could be adding to potential selling, along with fears that the start of student loan repayments in the U.S. will pressure overall consumer spending. As discussed on recent Tesla conference call, rising interest rates also hurt automotive sales as vehicle loan payments get more expensive.

We have also seen some recent selling from some of the most vocal Tesla bulls on the street. Ross Gerber has reduced the Tesla position in the AdvisorShares Gerber Kawasaki ETF (GK), which has taken the name out of the top spot in that ETF. Cathie Wood of ARK Invest has also sold nearly a million shares of Tesla in the past roughly nine weeks between the Ark Innovation ETF (ARKK), Ark Autonomous Technology and Robotics ETF (ARKQ), and the Ark Next Generation Internet ETF (ARKW). Ark Invest has a $2,000 price target on Tesla shares at the moment, but it is selling Tesla below $240 instead of other names that it has said have much less upside at the moment.

At the moment, I rate Tesla shares a hold, because there are many factors pushing in both directions. The company has certainly been the best when it comes to the electric vehicle space, and its growing energy business has the potential to really add to revenues and profits in the coming years. On the flip side, there are numerous concerns that I discussed today that seem to be weighing on the stock in the short term.

So what would be needed for the stock to rebound, and for me to perhaps upgrade to a buy here? Well, the first thing has to be stable vehicle pricing. Consumers aren't going to buy a vehicle if they think the price is going to be lower next week, and Tesla has always had a history of discounts late in its fiscal quarters to drive sales. The more promotions and price cuts we see, the more we will see margin and earnings estimates move lower, and that likely puts pressure on the stock.

We also need to see a little more leadership from Elon Musk here, because many investors are concerned about him being spread too thin. Investors also want to know that long delayed projects are finally going to see some meaningful contribution to the business soon. There is still no firm date on a potential Cybertruck delivery event, with the Semi and Roadster 2 also continuing to have their production ramps pushed further back. Until Tesla gets something really new on the road, its aging product lineup will only face more and more competition.

Tesla shares are down almost 25% from their recent peak just four weeks ago, and investors are looking for signs that the decline may be ending. The loss of the CFO was a big shock and added to questions over Tesla leadership, while more price cuts have analysts worrying about margins and earnings. Until Tesla can put some of these negatives behind it and start delivering on things like a buyback plan and the Cybertruck, it seems unlikely that the highly valued stock will really get going again, especially with the overall market in a rut on higher interest rate fears.