The Tesla Roller Coaster: Are Investors Ready To Ride?

Bonds & Stock Sale

Tesla (NASDAQ:TSLA) is asking the public for $2.3 billion after reporting a substantial loss in Q1 further diminishing its cash reserves. They are offering $738.7 million in stock, including underwriter options, as well as $1.35 billion in 5-year convertible bonds (expecting to receive $1.55 billion from auction). This is easing a lot of investors’ concerns about dwindling capital and liquidity. TSLA is up 4.6% today following this announcement.

Performance

As of April 15^th, 28% of Tesla stock was held short. This was before the latest earnings at which point TSLA was trading at $266. I am assuming that when TSLA broke into the $230 range (a price this stock hasn’t seen since early 2017) the short seller started to cover and it leveled the stock out around $240. TSLA is known for its volatility, since October 11^th last year (7 months ago) the stock rallied 50% then broke down 37%. This is an enormous amount of fluctuation for a large-cap automotive company, especially when TSLA’s price trend has inverse to the S&P 500. What I have found is there is nothing driving Tesla stock price expect for Tesla (and Elon Musk), it has a mind of its own.

Below you can see the 52-week TSLA (blue) vs. S&P 500 (red) chart. TSLA doesn’t have any correlation at all with the US equity benchmark. What you do notice are the bounces that TSLA continues to have off of a support level in the mid-$200s and a resistance level just north of $350. This stock has been a solid equity to trade over the past 52-weeks if you were able to gauge the troughs.

Outlook

Elon Musk is perpetually over-optimistic about the future of his company, so it is difficult to gage earnings guidance when expectations are typically overstated. Over the past 15 quarters, earnings have only hit or beat estimates 3 times, missing them 80% of the time. Investors are usually unsure of how to react to the latest earnings and are starting to take Elon’s promises with a grain of salt.

Tesla missed estimated earnings by over 60% and missed revenue estimates by more than 20%. This earnings report was still able to decrease the earnings deficit marginally Y/Y but lost a significant amount from the positive earnings Tesla was able to achieve the past two quarters.

Earnings estimates have adjusted down significantly for 2019 from a strong positive $6.24 per share to ($0.94) in just 90 days. Tesla earnings estimates are notoriously misguided. It is almost like Elon Musk likes to see volatility in his stock. TSLA is sitting at a Zacks Rank #5 (Strong Sell) because of this downward adjusted guidance but I don’t agree that this is a strong sell.

Tesla and Elon Musk are names that most Millennials believe in with Tesla’s revolutionary electric cars that has taken the automotive industry by storm and Elon Musk’s versatility genius who doesn’t only want to change our world but start a new one on Mars. Millennials will continue to buy this stock on new lows, with uncertainty being a focal point of TSLA, we are willing to make a bet on this company and its avant-garde CEO.

I am thinking about catching this "falling knife" on its new lows and continuing to average down if it breaks, knowing that this firm’s revolutionary technology is in demand and the stock is likely to rebound. The Telsa Model 3 remains the best-selling premium car in the US and has continued to gain momentum domestically and abroad.

Risks and Competition

Some risks associated with this stock includes economic downturns that cut consumer spending on discretionary products like vehicles. Increased competition is also a concern, with the Big 3 making moves to create their own electric and autonomous vehicles. Ford (NYSE:F) has a large presence in Silicon Valley and is planning to have 40 electric cars on the market by 2022. Ford will be releasing its first autonomous vehicle in 2021 according to management. General Motors (NYSE:GM) already has the electric Chevy Bolt on the market and is focusing on Cadillac being their EV segment moving forward with an electric car rexpected to be released in late 2021 or 2022. GM’s Buick and Chevrolet will follow Cadillac with their own EVs in the future. Fiat Chrysler (NYSE:F) released its first EV, the Fiat 500e, in 2013 with an 84-mile range. Fiat Chrysler has been losing $10,000 on every Fiat 500e sold. FCAU just invest $4.5 billion in existing Jeeps plants in order to have 10 hybrid plug-ins Jeeps and 4 all-electric Jeeps for consumers by 2022.

Don’t give up on Tesla yet. The powertrain technology behind an electric engine vs. a combustion one is entirely different. It will take years for the Big 3 to achieve what Tesla has and by then Tesla will have gained more and more market share and economies to scale that the Big 3 might not be able to compete with.

This $2.3 billion cash surge might be just the capital they needed to drive this electric car business into sustainable profitability.

In addition to the stocks discussed above, would you like to know about our 10 finest buy-and-holds for the year?

Who wouldn't? Our annual Top 10s have beaten the market with amazing regularity. In 2018, while the market dropped -5.2%, the portfolio scored well into double-digits overall with individual stocks rising as high as +61.5%. And from 2012-2017, while the market boomed +126.3, Zacks' Top 10s reached an even more sensational +181.9%.

See Latest Stocks Today >>