Tesla Motors stock is mired in a nearly eight-week-long losing streak, with investors concerned about stagnant car sales, falling earnings estimates, and rising capital spending.
The only way out of the mess looks to be self-driving cars.
“Tesla is closing in on 10 billion Full Self-Driving miles traveled,” noted Morgan Stanley analyst Andrew Percoco in a Friday report.
FSD is Tesla’s highest-level driver assistance product—the cost is $99 a month—that can do most of the driving. Barron’s has tested FSD many times. It’s impressive.
“This symbolic milestone reinforces Tesla’s autonomy lead, but with capex doubling and free cash flow turning negative, investors will need clearer evidence that unsupervised autonomy is around the corner to
support the stock’s valuation,” Percoco wrote.
In short, Tesla has racked up some impressive FSD stats. Now, that needs to be turned into earnings, either with robo-taxi expansion or more owners paying for FSD subscriptions.
Percoco wants a substantive robo-taxi update when Tesla reports first-quarter earnings on April 22. He rates shares Hold and has a $415 price target.
Tesla launched a robo-taxi service in Austin, Texas, in June.
“The subsequent rollout has admittedly gone slower than expected. Bears argue that this is a signal that Tesla’s technology doesn’t work,” wrote Percoco. “Instead, we believe the issues that Tesla is still working through (pickup and dropoff) are actually quite solvable.”
Investors aren’t so sanguine. Coming into Friday trading, the stock was down more than 20% over the past eight weeks, a losing streak that began after the company reported fourth-quarter numbers.
Options trading that had supported the stock has waned this year, another indication of weakening investor sentiment.
GLJ Research analyst Gordon Johnson took a deep dive into options trading for the stock. He found a few things:
Retail traders tend to buy Tesla call options aggressively. Call options give the holder the right to buy a stock for a fixed price in the future. They are bullish bets that pay off big if share prices rise quickly. Aggressive call buying tends to support any stock. Importantly for Tesla, he found the call buying is dwindling.
There is no fixed number of call options. Dealers are more than happy to write a call option contract if the demand is there. When a dealer writes a call option, however, it might need to hedge its exposure. They don’t want to make or lose money on options speculation. They only want to collect a profit on the spread.
To hedge a call option, a dealer can buy the underlying stock. That way, if the stock rises, the dealer makes some money on the stock to offset losses on selling the options contract.
But buying stock can drive up prices, making the options more valuable, creating the need to buy more stock to hedge, and creating a “gamma squeeze.”
Options traders use Greek letters to describe some features of options. Gamma is essentially the rate of change in a stock option’s delta, and the delta is how an option price changes with changes in the underlying stock. The details are less important than understanding that aggressive call buying can create a positive feedback loop that pushes a stock price higher.
That process has played out countless times over the past few years with Tesla shares, according to Johnson.
Tesla stock was up 1.2% at $348.57 in early trading; the S&P 500 was up 0.2% and the Dow Jones Industrial Average was down 0.2%.
Johnson has been Wall Street’s biggest bear on Tesla stock for a long time. He rates shares Sell and has a $25.28 price target.
That’s roughly $380 away from the average analyst price target and $100 off the next lowest target price, and values Tesla at about $115 billion based on the company’s fully diluted share count. The stock was valued at $1.5 trillion at Thursday’s close.
