I believe Tesla is nearing a new breakout. My belief is based on technical patterns, the current narrative, improving fundamentals, and potential inclusion into the indexes.
There's always something going on with this name. It wouldn't be Wall Street's darling otherwise. Options traders can make a living trading this stock alone. Volatility can be vomit inducing or put you to sleep, depending on the week. To my best understanding the current narrative on the stock is that the recent quarter was strong, but executive departures and Big Money reducing holdings have overshadowed the price action. Morgan Stanley emphasized how the currently expanding and already massive supercharger network will act as a moat against the aspiring competition; this note was likely released because most saw the Audi commercial during Super Bowl and so the word is out that other brands are now focusing on electric options. I see this as Tesla fulfilling their mission statement to accelerate the adoption of sustainable technology and a bullish event. In my opinion the 2020 Roadster looks better than the Audi concept art but by inspiring brand pride the electric vehicle segment looks ready to explode and Tesla is already positioned well. Another huge piece of the current narrative is the looming convertible debt. The price is much too low for the conversion and you can bet your hat short-sellers will do anything in their power to prevent the current cash balance from growing. This leads me into the recent developments in the last two quarters.
Before I explain the technical analysis above I would like to highlight some very important developments at a fundamental level. Since inception (barring two outlier quarters) Tesla has been a negative EPS company with a cash burn that accelerated faster than a Falcon Heavy. At times the outlook for the company looked bleak. However, with two quarters of positive and increasing cash flow and two quarters of positive EPS the future now looks much brighter. Particularly because these results seem to be organically driven rather than financially engineered. Demand for the Model 3 is explosive and isn't likely to wane anytime this year. More information regarding the model Y is going to be revealed next month and the Semi should be reaching consumers soon. Assuming the demand for these products stays how it has stayed for many years its safe to assume the step-wise compounding ramp Elon has explained is not just feasible but probable. This excludes developments on the solar front which have been largely hushed since the massive success in Australia. If Tesla maintains positive earnings into 2019 its large market cap will qualify it for nomination into the major indexes which will cascade a flood of inflows from index funds re-balancing to match the index compositions. I can't emphasize how bullish this scenario would be without putting a number on it: $500.
My technical analysis above supports the narrative and the fundamental developments and so we'll begin from the left and move toward the present. In 2013 Tesla made its first big run. It consolidated here into a massive bull flag (fraught with volatility and an environment that favored bearish opinion) until 2017 when the next leg up occurred. I highlight these moves with red lines of equal size that should be easily noticed. Another long term trend line I like to use is the compounding curve from inception anchored at critical points. My critical points here were the 2016 lows and the base of the subsequent leg up. We'll refer to this again in a moment.
The current chart environment looks almost identical to the previous leg-up and flag, with one key difference: volatility. Compared to the previous consolidation cycle this recent cycle has had its dips bought quickly and vigorously. Possibly due to the radically improving financial statements. I've used a mix of fib retracements to generate price ranges for the near term future and this is where I derived my price balloons. Notice that the price structure is forming what looks like a double-bottom inverse head and shoulders. Today's current price of $307.55 is sitting right on this fib 0.382 line. Support here suggests we move up toward the neon green area with my short term price target at $336.22. Reaching this price point by about mid 2019 would coincide with a rare alignment of tailwinds. First off, it would represent a full 2 year consolidation from the previous run up in 2017, similar to the duration of the consolidation cycle after 2013. Also, we'll have a couple more quarters of hopefully positive results from Tesla by then igniting the "index" narrative.
This name comes with absolute risk and shouldn't be purchased or sold without understanding that. At any moment a bearish thesis could stick and the price could quickly find itself touching $280 or even barrelling toward the $250's lows. As a long term investor I say buy those dips, but don't rush into buying a falling knife either. Wait for consolidation and materialized resistance to make your move. If the price ever gets below the lows of the initial consolidation dump everything or buy a ton of puts. Prudent but wise use of puts can and probably should be used at all times when overweight this ticker.
Many followers of the stock will know that Baird has had a $500 price target on Tesla for years now. Not ironically, the alignment at 4 full quarters of positive and hopefully growing earnings paired with my compounding curve and previous leg-ups would put the price just over $500. I'll stick with my $550 because the Tesla Network is going to revolutionize what it means to own a Tesla.
There's always something going on with this name. It wouldn't be Wall Street's darling otherwise. Options traders can make a living trading this stock alone. Volatility can be vomit inducing or put you to sleep, depending on the week. To my best understanding the current narrative on the stock is that the recent quarter was strong, but executive departures and Big Money reducing holdings have overshadowed the price action. Morgan Stanley emphasized how the currently expanding and already massive supercharger network will act as a moat against the aspiring competition; this note was likely released because most saw the Audi commercial during Super Bowl and so the word is out that other brands are now focusing on electric options. I see this as Tesla fulfilling their mission statement to accelerate the adoption of sustainable technology and a bullish event. In my opinion the 2020 Roadster looks better than the Audi concept art but by inspiring brand pride the electric vehicle segment looks ready to explode and Tesla is already positioned well. Another huge piece of the current narrative is the looming convertible debt. The price is much too low for the conversion and you can bet your hat short-sellers will do anything in their power to prevent the current cash balance from growing. This leads me into the recent developments in the last two quarters.
Before I explain the technical analysis above I would like to highlight some very important developments at a fundamental level. Since inception (barring two outlier quarters) Tesla has been a negative EPS company with a cash burn that accelerated faster than a Falcon Heavy. At times the outlook for the company looked bleak. However, with two quarters of positive and increasing cash flow and two quarters of positive EPS the future now looks much brighter. Particularly because these results seem to be organically driven rather than financially engineered. Demand for the Model 3 is explosive and isn't likely to wane anytime this year. More information regarding the model Y is going to be revealed next month and the Semi should be reaching consumers soon. Assuming the demand for these products stays how it has stayed for many years its safe to assume the step-wise compounding ramp Elon has explained is not just feasible but probable. This excludes developments on the solar front which have been largely hushed since the massive success in Australia. If Tesla maintains positive earnings into 2019 its large market cap will qualify it for nomination into the major indexes which will cascade a flood of inflows from index funds re-balancing to match the index compositions. I can't emphasize how bullish this scenario would be without putting a number on it: $500.
My technical analysis above supports the narrative and the fundamental developments and so we'll begin from the left and move toward the present. In 2013 Tesla made its first big run. It consolidated here into a massive bull flag (fraught with volatility and an environment that favored bearish opinion) until 2017 when the next leg up occurred. I highlight these moves with red lines of equal size that should be easily noticed. Another long term trend line I like to use is the compounding curve from inception anchored at critical points. My critical points here were the 2016 lows and the base of the subsequent leg up. We'll refer to this again in a moment.
The current chart environment looks almost identical to the previous leg-up and flag, with one key difference: volatility. Compared to the previous consolidation cycle this recent cycle has had its dips bought quickly and vigorously. Possibly due to the radically improving financial statements. I've used a mix of fib retracements to generate price ranges for the near term future and this is where I derived my price balloons. Notice that the price structure is forming what looks like a double-bottom inverse head and shoulders. Today's current price of $307.55 is sitting right on this fib 0.382 line. Support here suggests we move up toward the neon green area with my short term price target at $336.22. Reaching this price point by about mid 2019 would coincide with a rare alignment of tailwinds. First off, it would represent a full 2 year consolidation from the previous run up in 2017, similar to the duration of the consolidation cycle after 2013. Also, we'll have a couple more quarters of hopefully positive results from Tesla by then igniting the "index" narrative.
This name comes with absolute risk and shouldn't be purchased or sold without understanding that. At any moment a bearish thesis could stick and the price could quickly find itself touching $280 or even barrelling toward the $250's lows. As a long term investor I say buy those dips, but don't rush into buying a falling knife either. Wait for consolidation and materialized resistance to make your move. If the price ever gets below the lows of the initial consolidation dump everything or buy a ton of puts. Prudent but wise use of puts can and probably should be used at all times when overweight this ticker.
Many followers of the stock will know that Baird has had a $500 price target on Tesla for years now. Not ironically, the alignment at 4 full quarters of positive and hopefully growing earnings paired with my compounding curve and previous leg-ups would put the price just over $500. I'll stick with my $550 because the Tesla Network is going to revolutionize what it means to own a Tesla.