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The Tesla Trade

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Tesla (TSLA - Free Report) just announced its win in the dismissal of a securities fraud allegation for the second time. Shareholders claimed that the company made misleading remarks about their Model 3 production numbers. This case was finally dismissed after a year and a half of litigation. TSLA got a little boost today after the judicial decision, trading at $268 up about 3% for the day.

TSLA is down from its last peak of $376 in December with a trough of $250 in October earlier in the year. The cyclicality of this stock is a trader’s fantasy. As you see in the chart below, TSLA consistently bounces off the $250-$260 support level and rallies up to its resistance level around $375, then does the whole dance all over again.

 

Tesla just posted its first positive earnings in Q3 and was able to remain positive coming into the start of 2019. The stock’s most recent drop was due to a conference call with Elon Musk where he provided color to their expected unprofitability in Q1.

“Given that there is a lot happening in Q1, and we are taking a lot of one time charges, there are a lot of challenges getting cars to China and Europe, we do not expect to be profitable in Q1. We do think that profitability in Q2 is likely.” – Elon Musk

These all appear to be short term non-systemic issues with TSLA and could have opened up a buying opportunity for the shrewd traders out there.

Telsa is a Cinderella story. The barriers to entry into the automotive industry are unrealistically high as well as the unparalleled competition that has pushed these companies to paper-thin margins. Telsa and its pioneering CEO Elon Musk were able to move around these barriers and offer a high demand car with little to no competition in the market place. The electric car is no doubt the future of our roadways and Tesla was able to penetrate this opportunity fully. They were the most demanded luxury vehicle in 2018 and were able to achieve the same margins as the competition (charts from Tesla’s investor relation site). 

 

Over the past 5 years, TSLA hasn’t seen a substantial amount of growth compared to its competition: Fiat Chrysler (FCAU - Free Report) , General Motors (GM - Free Report) , Ford (F - Free Report) . I believe this is because there was so much hype priced into TSLA and its groundbreaking origins that the performance hadn’t had enough time to catch up to the stock price. I estimate that it finally has.

 

 

Tesla has post seemingly exponential revenue growth to meet a growing demand for electric cars, and this growth trend is far from over. I believe that TSLA would make an excellent short-medium term trade at its current price level, due to the stocks cyclicality, with the potential of this investment being a long term buy pending systemically positive Q2 earnings – Zacks Ranking #3 (Hold).

 

 

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