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Tesla (TSLA) is expected to report results on its fiscal fourth quarter on Wednesday, January 25, with a conference call scheduled for 5:30 pm EDT. What to watch for:

Q4 ‘HARD TO READ’: Tesla’s Q4 may be “particularly hard to read” due to the potential recognition of a significant amount of deferred revenue from offering a greatly expanded feature set from FDS to a broader population of consumers, Goldman Sachs says. Among a range of attach rate and accounting assumptions, the firm is prepared for the FSD unlock to potentially add several hundred million dollars to automotive gross profit, or potentially up to 300 to 500bps of gross margin. Investors will also be looking at projected ATP impact following price cuts during the company’s conference call. Goldman expects Tesla management to extol the positive reaction to its recent price cuts, reiterating its long-term language of 50pct type unit growth over time. While the firm expects cautionary language on the macroeconomic environment, it nevertheless expects Tesla to express a view that demand is not a problem. Goldman has an Overweight rating on the stock with a price target of $250.

‘SIZABLE’ GROSS MARGIN MISS: Earlier this month, Guggenheim downgraded Tesla to Sell from Neutral with an $89 price target as it forecasts a "sizable" gross margin miss in Q4 to be driven mainly by price reductions and incentive actions taken during the quarter. Assuming incremental price cuts in Europe, the latest price cuts in the U.S., and no incremental reductions in China, its view is currently 650 basis points below the consensus gross margin estimate and believes full year 2023 estimates "need a reset." Tesla used prices are declining at about three times the rate of the market over the last three months, which "represents another signal of near-term oversupply," the firm adds.

TARGET CUTS AHEAD OF EARNINGS: JPMorgan lowered the firm's price target on Tesla on Wednesday to $120 from $125, while keeping an Underweight rating on the shares. The firm believes Tesla's "aggressive" price cuts could help "catalyze and accelerate what may have otherwise been a more modest or protracted pricing normalization process." The price cuts are positive for the consumer, negative for Tesla, negative for other automakers and potentially positive for parts suppliers, the firm adds. JPMorgan also materially lowered estimates for Tesla to reflect the "margin dilutive" price cuts. Cutting its 2023 earnings per share estimate to $2.29 from $4.60, the firm says the company's margin headwind may be underappreciated by investors.

On Thursday, Deutsche Bank also lowered the firm's price target on Tesla to $220 from $250, keeping a Buy rating on the shares. The firm expects a mixed Q4 earnings and 2023 guidance season for U.S. autos, with several companies potentially missing quarterly consensus estimates, and most of them likely to issue cautious 2023 guidance amid ongoing choppy industry conditions and macro uncertainty.

SHIFTING COMMENTARY EXPECTATIONS: Oppenheimer believes that with Tesla resetting prices, expectations for the company’s commentary on its Q4 results call are shifting quickly. The firm thinks the company is making a proactive move to capture incentives but also to reset prices on EVs in key markets to help protect the company's market position and apply pressure on competition from a cash flow perspective. Further, Oppenheimer thinks investors anticipate a reset on auto manufacturing margins to mid-20's and that the core issue on Tesla shares is whether the company can continue to grow while maintaining premium margins for both GM and OM. The firm continues to anticipate mixed trading on shares as EV competition begins to play out and expects updated margins to be modestly better than feared with consensus volumes moving slightly lower. The firm has a Perform rating on the shares.

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