Tesla (TSLA) Sell-Off Intensifies Ahead of Earnings

Perhaps no automobile stock in history has experienced as much volatility as Tesla, Inc. (TSLA). From disruptive startup to social media darling, Tesla stock has run the gamut of popularity with its equally polarizing CEO Elon Musk. No company has perhaps better personified the supposed speculative overvaluation plaguing the market as the electric car maker, which has recently experienced a staggering pullback to start 2022.

Investors have bid down Tesla shares more than 20% since the start of January as the company heads into earnings for the fiscal fourth quarter. Option volatility is at a high as analysts expect Tesla to announce $2.36 in earnings per share (EPS) to go along with $16.65 billion in revenue. This represents an expected increase in profit of more than 100% and an expected increase in revenue of nearly 60% based on the same quarter a year ago.

Option traders appear to be placing bets implying that they think the recent downward trend for the Tesla share price will continue. That's because recent option order sentiment has shifted from bullish to bearish as the share price has tumbled and the electric vehicle sector continues to be plagued by supply chain constraints.

Despite the seemingly grim outlook, analysts continue to issue bullish assessments ahead of Tesla's earnings for the fiscal fourth quarter. While the carmaker has opened two new factories and reported record deliveries for its electric vehicles, analysts will be looking toward Tesla's fundamentals, including gross margin, and how the company plans to retain its market share advantage.

Comparison in the Auto Industry

Despite the recent sell-off of Tesla shares, the company remains the largest automobile manufacturer by market capitalization by a wide margin. The market cap of Tesla is nearly three times that of its Toyota Motor Corporation (TM), its closest competitor size-wise in the industry. Over the past month, Tesla stock has slid 22% compared to a 6.3% increase in the share price of Toyota. The chart below compares the recent performance of Tesla and Toyota with eight of the top auto manufacturer stocks by market cap, along with First Trust's Global Auto Index Fund (CARZ).

It's notable on this chart that, despite its "meme stock" status over the course of the COVID-19 pandemic, Tesla has been outperformed by industry stalwarts such as Toyota, Ford Motor Company (F), Stellantis N.V. (STLA), and Honda Motor Co., Ltd. (HMC). Nearly all of the electric vehicle stocks, which up until recently were experiencing outsized gains, are underperforming their gas-centric peers.

CARZ is an exchange traded fund (ETF) that does not capture the broad, global automobile industry, as it contains no positions in the upstream part suppliers and accessory manufacturers and is light on emerging markets in general. Despite having a market cap larger than the other automobile manufacturers in this chart combined, Tesla accounts for less than 7% of the total CARZ weighting.

The automobile has been struck by supply chain constraints as a result of the COVID-19 pandemic, as well as established chip shortage. While Tesla has managed to outpace its expected delivery totals of vehicles, none of the other top automobile stocks—outside of the recently IPOed Rivian Automotive, Inc. (RIVN)—has experienced as aggressive of a downturn as Tesla.

The chart below compares the recent performance of Tesla with CARZ, Ford, Simplify's Volt Robocar Disruption and Tech ETF (VCAR), and iShares' Semiconductor ETF (SOXX).

This chart comparison is compelling, as it incorporates a more relatable disruptive automobile tech performance to Tesla via VCAR, along with perhaps the largest issue plaguing current automobile manufacturing (chip shortage), via SOXX.

VCAR is a portfolio of global stocks that derive a significant portion of their revenue from robocar disruption and related technologies. Tesla represents 9.5% of the ETF's total weighting. It's notable that the performance of Tesla and VCAR essentially follow one another. The pair has managed to outperform the lagging SOXX and CARZ, while falling behind Ford, which has performed strongly on the basis of entering the electric vehicle space for itself.

Price Action and Options Outlook

Comparing price action and option trading can provide chart watchers insight into the sentiment traders and investors hold toward a company's future performance. However, further context of price action in terms of volume could illustrate areas of support and resistance, which could provide additional context to option open interest. The chart below illustrates the recent price action of Tesla, in addition to a price-based volume pattern on the left side.

This price-based volume pattern depicts the prices where investors have bought and sold the shares previously. A noticeable amount of buying in the past often implies that investors will feel the desire to defend their positions at those same prices by buying more shares or at least not selling any further. When volumes at a given price are low or nonexistent, it implies that few, if any, investors have the need to defend their positions at these levels.

A notable thin volume zone appears at the most recent Tesla closing price. This zone, highlighted by the green rectangle, represents an area of low volume; however, the volume in this zone appears to be biased toward buying. That could make this zone a significant area of support for prices going forward. Below this zone appears to be a mixed bag of buying and selling volume, but these levels have not been tested since before the prior Tesla earnings report.

Option trading sentiment has recently begun to shift from bullish to bearish. While the 30-day average for Tesla option trading volume has seen call options maintain an edge over puts at a roughly 60-40 percent split, the five-day average closes the gap a bit to 53-47 percent. Trading volumes on Monday, Jan. 25, were split nearly exactly down the middle based on the total number of contracts. However, trading volumes edged to the bearish side when considering the notional value of total contracts.

This is important ahead of earnings, considering that, for Jan. 28, the next weekly option expiration date, the highest open interest is on the $1,100 call with 16,500, which would represent an 18% upside to the current Tesla share price. The most significant open interest to the downside is on the $1,000 put, with 9,400. This represents a perhaps more realistic 7% downside to current share prices. The current implied earnings move based on the at-the-money straddle pricing is 10.8%. This means that there is a better possibility that the $1,000 puts end up in the money as compared to the $1,100 calls.

Wrapping Up

Throughout its entire history, Tesla stock has remained popular with investors. As the market begins to move out of a period of speculative growth, company fundamentals, specifically profit margins, will continue to dominate the focus of earnings. Option traders appear to be shifting toward a more bearish outlook as the share price remains close to an area of support based on volume.