Musk ditches EVs for AI: $20B bet on robotics?

Monta HONG CFA

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Tesla Earnings Preview: The Good, The Bad, and The AI Catalyst

$Tesla (TSLA.US)$ will report Q4 2025 earnings on January 28(WED) after market close. With delivery numbers already disappointing and Wall Street split on the stock, this earnings report could trigger major volatility. Let's break down what matters and how to position yourself.

Fundamental: The Good, The Bad, and The AI Catalyst

The Bad News is Already Out

Tesla delivered 418,000 vehicles in Q4, down 15.6% YoY. This marks the second consecutive year of declining auto sales. Analysts expect:

– Revenue: $25.1 billion (down 2% YoY)

– Adjusted EPS: $0.34 (down 49% YoY)

– Net Income: $1.59 billion (down 38% YoY)

The market already knows this. The real question: Can Tesla hold the ** on profitability?

Number of Tesla vehicles delivered worldwide from Q1 2016 to Q3 2025

The 15% Margin ** in the Sand

Auto gross margin (ex-credits) is the critical metric. Bulls need to see margins stay above 15-17% despite:

– Price wars globally hurt auto margin (down from 30% to 15%, especially vs. BYD/NIO/XPEV/HUAWEI in China)

– Higher costs from Cybertruck production ramp

– Tariff impacts ($400M hit in Q3)

If margins collapse below 15%, the "Tesla is still a car company" narrative wins. If they hold or improve, it validates the cost-cutting efforts.

Tesla Gross Margin by Segment by quarter from 2020 to 2025

Energy Business: The Bright Spot

Tesla deployed a record 14.2 GWh of energy storage in Q4 (up 49% for the full year). This is pure gold:

– Energy gross margins expected at 31% (vs. auto's 15%)

– Megapack demand is booming due to grid needs

– This business alone could justify a premium valuation

Watch for: Guidance on 2026 Megapack deployments and whether tariffs hurt pricing power.

Tesla Energy Storage Deployment by years

The AI Wild Card: FSD & Robotaxi

Tesla announced FSD will become subscription-only after Feb 14 ($99/month). Key questions for the earnings call:

1. Austin Robotaxi data: Any real numbers on "disengagement rates" or operating costs?

2. Timeline credibility: Is Cybercab production still on track?

3. FSD take rate: Can it break above 12% with the subscription model?

The bulls (like Wedbush with a $600 target) believe Robotaxi will push margins to 70-80% (SaaS-like). The bears (like UBS at $307, rated Sell) say this is 2-3 years away and current valuation is insane.

Valuation Analysis: A House Divided

Bull Case: Tesla is an AI Company

– Wedbush: $600 target, sees $2-3 trillion market cap by 2026

– ARK's Cathie Wood: Robotaxi margins of 70-80% change everything

– Morgan Stanley: Energy storage is the "underestimated growth engine"

Bulls focus on: Robotaxi scaling, Optimus robot potential (Musk claims it could make Tesla worth $25 trillion), and energy dominance.

Bear Case: Sky High Valuation

– UBS: $307 target (Sell rating), valuation "disconnected from fundamentals"

– Concerns: Deliveries falling, competition crushing margins, AI timeline too uncertain

Bears point out: Even with optimistic assumptions, Robotaxi contributes almost nothing to revenue in 2026-2027. The stock already prices in perfection.

Options Playbook

Options market implied an 6% move after earnings, smaller than previous earnings expected move.

Tesla Post Earnings Expected Move

With NASDAQ's new Monday and Wednesday expirations, Tesla now offers options expiring on February 2 (Monday) and February 4 (Wednesday) .

If you're interested in making an earnings play with options but want to reduce volatility risk, next week's expirations might be a better choice than this Friday's.

Tesla Options Chain

Tesla's options are unusually cheap: Implied Volatility (IV) at 50% and IV Percentile at 7%. Options premiums are at their lowest levels in a year. This is rare before earnings when volatility typically spikes. For bearish traders, you're getting downside protection at cheaper prices.

Tesla Implied Volatility

Strategy 1: Long Put (Aggressive Bearish)

– The View: You believe the bad news isn't fully priced in. If auto margins slip below that critical 15% ** or guidance on 2026 volume is weak, you expect the stock to break support and fill lower gaps.

– The Logic: With IV at the 7th percentile, option premiums are historically inexpensive. Usually, buying options before earnings is risky due to IV crush (volatility dropping after the event). However, current pricing allows you to buy pure downside exposure without paying a massive premium for uncertainty.

– The Setup: Buy an At-The-Money (ATM) or slightly Out-of-The-Money (OTM) put expiring after the earnings release. This offers unlimited profit potential to the downside, with your risk strictly limited to the initial premium paid.

Strategy 2: Bear Put Spread (Conservative Bearish)

– The View: You agree with the bears that valuation is "disconnected," but you anticipate a moderate pullback rather than a total collapse.

– The Logic: This strategy lowers your cost basis compared to a straight Long Put. By selling a further out-of-the-money option against the one you buy, you mitigate the effects of time decay (theta) and reduce the capital required to enter the trade.

– The Setup: Buy a higher strike put (near the current share price) and sell a lower strike put. Your maximum profit is capped at the difference between the strike widths minus the cost of the spread, but your break-even point is easier to achieve.

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