Can Tesla Inc (TSLA) Stock Reclaim All-Time Highs in August?

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A double whammy from the Insurance Institute for Highway Safety and Tesla Inc’s (NASDAQ:TSLA) own press room hampered a month that was supposed to be all about hailing the emergence of the Model 3. In early July, TSLA stock took a sharp drop, and while it has recovered somewhat, shares still are down 15% from the company’s all-time highs set in June.

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Unfavorable valuations never stopped Tesla from climbing. However, the IIHS’ questioning of Tesla’s claim that the Model S is the safest car in history, as well as weak delivery data for the second quarter, were able to do the trick.

Since then, the Model 3 has officially begun deliveries, and Q2 earnings are on deck this week.

What’s next for TSLA stock?

Tesla 3 Release

The most important aspect of Tesla right now remains the Model 3.

The company has launched its mass-market electric vehicle at a (relatively) affordable cost of $35,000. Tesla accepted more than 400,000 reservations since last year, with $1,000 down payments to boot.

Since it is targeting the mainstream market, this model’s initial success will depend on Tesla rolling out the Model 3 on time — which it has. The company is now expected to ramp up to 20,000 units monthly by December.

Unfortunately, sustained sales of Tesla vehicles depends on the government offering tax credits. When Hong Kong cut the tax break on EVs on April 1, Tesla sold just five vehicles last April and May. In the quarter ahead of the end of the tax break, the company sold 3,700 units.

Tesla clearly needs governments offering tax credit incentives to spur demand, at least on some level. That’s a problem considering TSLA has less than 80,000 U.S. tax credits (worth about $7,500 each) left, according to Edmunds.

You may have noted that 80,000 is well short of 400,000. It’s impossible to know how many people invested, banking on pulling in that tax credit, but cancellations could become an issue once those credits run out.

How Competitive Is the Competition?

Last April, General Motors Company’s (NYSE:GM) Chevy Volt benefited from higher unit sales as the demand of electric cars grew. Ford Motor Company’s (NYSE:F) hybrid and full-electric lineup and Toyota Motor Corp (ADR)’s (NYSE:TM) Prius are also competitive threats to Tesla’s offerings.

Volvo went even farther, announcing it would make its entire lineup of cars on the market electric or hybrid by the year 2019. If other automakers follow suit, that could drastically increase the competition Tesla faces in selling electric vehicles.

Still, despite the rising competition, the addressable market for electric vehicles is big enough to sustain years of growth for Tesla. BMW and Mercedez-Benz also offer high-end EVs, but at price points that do not compete effectively with Tesla.

That Pesky Valuation … Isn’t So Bad?

While TSLA stock isn’t cheap at 6.3 times sales and 10.7 times book, I do like the 1.6 debt-to-equity ratio in the face of over-the-top concerns about Tesla’s debt.

Still, bears have driven up a short interest percentage of roughly 30% of Tesla’s float. No doubt many of these doubters don’t believe TSLA should command a market capitalization greater than that of Ford or General Motors.

And considering the expense, any fears that the glow on the Model 3 will dim should spark a drop in share prices. If findings from IIHS lead to higher insurance rates for Tesla car owners, for instance, that could hurt overall demand for the vehicles. Of course, the safety finding’s impact on sales is purely speculative.

I would argue that if Tesla sustains revenue growth of between 25%-65% over the next five years, then at a discount rate of between 8%-9%, TSLA stock is actually. Tesla just needs to keep its production line running to meet the steady orders in that time.

Bottom Line on TSLA Stock

The bears are increasingly confident amid a July that has mostly belonged to the pessimists. Tesla now needs second-quarter earnings and other future data to show that the high-end models (Model S and Model X) can hold up amid interest over the new Model 3.

Still, assume for now that Model 3 sales won’t hurt demand. If anything, targeting the mainstream market will simply put the company in direct competition with gas-powered cars.

That’s a good thing. It opens up a new chapter for Tesla as its market share grows further.

As of this writing, Chris Lau was long F.

Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get actionable insight to achieve strong investment returns.


Article printed from InvestorPlace Media, https://investorplace.com/2017/07/can-tesla-inc-tsla-stock-reclaim-all-time-highs-in-august/.

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