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Tesla (TSLA): Does This Rally Still Have Legs?

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Tesla (TSLA - Free Report) bulls have had a field day the past 3 months as this equity enigma soars towards $100 billion market valuation. One of Wall Street’s most shorted stocks has rallied over 100% since its last earnings report in October. 2019 may be the first year that Tesla, an enterprise known to over promise and under deliver, meets its lofty expectations. The king of electric cars is now the most valuable US automaker ever.

Tesla announced that it deliver a record-breaking 112,000 cars this past quarter, rounding out the year with 367,500 car deliveries. This was a 50% improvement from 2018, with growth being driven by the increasingly popular economy class Model 3. Ostentatious CEO Elon Musk made a lofty claim that the company would deliver 350,000 to 400,000 cars in 2019, and no one took him seriously, primarily because he has made other “overly optimistic” claims in the past that didn’t pan out. 

Elon made another outlandish claim that Tesla would be producing Model 3’s by the end of 2019. Musk is finally keeping his promises with the Shanghai Gigafactory being set up in record time and producing 1,000 cars a week by the end of last year. The Shanghai Gigafactory was the best news that came out of Tesla in 2019.

This gives Tesla direct access to the largest EV market on earth and allows the firm to bypass the volatile trade conflict between the US and China. Tesla hopes to source 100% of its production from China by the end of 2020, which will cut costs and give the company good rapport with the local government.   

Tesla is slowly taking over the world with an announced Gigafactory 4, which will be constructed outside of Berlin and is expected to be producing vehicles by next summer.

Is TSLA Worth The Price?

These shares have doubled in value in just 3 months, but have investors & traders pushed this stock above its intrinsic value? In June of 2019, only 6 months ago, this stock was trading below $200, almost a third of what it is trading at today. Has the news in the second half of 2019 really warranted a stock rally of nearly 200%?

Tesla has still yet to turn an annual profit and holds a debt to total capital ratio of 66%. Despite these concerns, the narrative for this stock’s $92 billion market cap is still compelling considering how quickly the firm has been building out its base.

This stock has rallied hard and fast, and typically after a rally like this, you will see a bit of pullback. I expect this stock to fall below $500 going into its Q4 earnings, which will be reported Wednesday, January 29th.

TSLA is typically a big mover on earnings with an average price action of 9.2% over the last 8 quarters (4 up, 4 down). Zacks Consensus estimates are showing an EPS of $1.62 on sales of $7.05 billion, which would represent a marginal decline on both metrics.

Take Away

2019 was the year that Tesla finally met its ambitious promises now can they keep them? If the global economy can stay afloat, 2020 should prove to be another stellar year for TSLA as its investments begin to pay off. TSLA surpassed Ford (F - Free Report) General Motors (GM - Free Report) and Fiat Chrysler (FCAU - Free Report) to become the most valuable automaker in the US, 2020 may be the year that Tesla becomes the most valuable automaker in the world.

Pay close attention to management’s sentiment towards the Shanghai Gigafactory and the upcoming Berlin Gigafactory. These two new manufacturing plants are the defining components of Tesla’s global electric vehicle empire that is going to take this stock into the stratosphere.

This stock is a buy at any price below $600 for long term investors, but if you’re looking for short term positions, I may wait for a pullback.

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