Tesla Motors Inc (NASDAQ:TSLA) is a notoriously difficult stock to gauge. Sure, there are other names — Apple Inc (NASDAQ:AAPL) comes to mind — that can give analysts headaches. But plenty of those organizations give customers exactly what they already want, and they’re hooked. TSLA is different — it’s about changing consumer demand to fit its mold. That makes Tesla stock both an incredible opportunity … and an incredible risk.
Let’s start with the obvious. Before TSLA first introduced its two-door roadster, most people thought electric cars were novelty items. Quiet, quirky, safer for the environment — descriptions that Toyota Motor Corp (ADR) (NYSE:TM) captured perfectly with its Prius.
But the Prius wasn’t sexy. EVs weren’t sexy. Electric or hybrid vehicles were purely pragmatic.
But the Roadster quickly shifted the paradigm of the automotive industry. As a result, Tesla stock soon became one of the hottest tickets in town.
Although it’s a relative newbie, the tech company — led by pioneer Elon Musk — has amassed street cred among gear heads and automotive enthusiasts. According to Bloomberg, the flagship Model S is the “world’s fastest-accelerating car,” which can do 0 to 60 miles per hour in two-and-a-half seconds. Even better, TSLA just released a software update that will shave off a tenth of a second.
You’re just not going to get that kind of performance in a fossil fuel platform unless you pay big bucks. That’s part of Wall Street’s love affair with Tesla stock.
Tesla Stock Faces Fundamental Challenges
Of course, it hasn’t been all fun and games, especially recently. And Tesla stock has given many investors pause for the better part of a year.
The company’s main challenge is that it doesn’t have economies of scale working favorably (yet). A firm like Amazon.com, Inc. (NASDAQ:AMZN) is successful because they found a way to marry price point and convenience. But $35,000 for the most basic, low-end model (the Model 3)? That’s a tough act for anyone to pull off in this economy.
Still, Tesla did provide some hope via its most recent quarter, in which the company scaled up production, and also managed to produce a profit.
Success and profitability for Tesla stock hinges on what kind of company it wants to be. If it doesn’t mind being an ultra-exclusive brand like Ferrari NV (NYSE:RACE), then so be it. But then the investment decisions of TSLA — particularly in manufacturing platforms — don’t make a whole lot of sense. If the company wants to capture market share, then it has to do something about the pricing. For a few thousand dollars more, people can buy a brand-spanking-new Mercedes Benz.
Unfortunately, the company is heading in the other direction, raising the price of its Model S.
The same frustration can be felt with TSLA’s proposed buyout of SolarCity Corp (NASDAQ:SCTY). With the election of Donald Trump, “go green” initiatives are expected to flounder like a New Year’s resolution to lose weight.
Even if fears associated with a Trump administration never materialize, there are still questions regarding the company’s solar energy business. Either way, Tesla stock holders haven’t exactly warmed to the idea.
The Technical Argument Favoring TSLA Stock
So with a mixture of hot and cold, what’s the final verdict on TSLA stock?
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But the problem is worse than just a series of hair-pulling incidents. Since September of 2014, spike rallies in TSLA stock have peaked at lower levels. Investors also received a mighty scare earlier this year when shares almost dropped to $140. So regardless of all the wonders that Musk provides, there’s a trust factor with Tesla stock that’s not adequately addressed.
However, there’s one angle that all interested parties should consider.
When viewing Tesla stock from a quarterly-average framework, the picture becomes a lot clearer. Instead of a company in decline, we see what could very well be a classic bullish flag. This is a negatively tilted consolidation pattern following a sharp rally. After the consolidation is over, the stock resumes its bullish run.
That’s basically what you have here with TSLA stock. The pattern’s “flagpole” is represented by Tesla’s earth-shattering rally in 2013. But from 2014 onward, shares entered a frustrating consolidation channel as investors questioned Musk’s business acumen.
Technically speaking, though … Tesla stock is primed to break out in a very big way.
Tesla Looks Good, But Don’t Get Carried Away
When you compare the TSLA chart to other stocks exhibiting the bullish flag signal, it’s hard not to get excited. Certainly, there is an argument to be made that investors should buy the weakness now before it jumps higher.
This is completely understandable, but allow me a few words of caution.
First, there’s no magic to technical analysis. Even the most compelling chart patterns have a probability of failure. Like anything, it’s a numbers game. Second, there’s no telling when that breakout move will occur for Tesla stock, if it occurs at all. Like others have pointed out, this is a great company. However, the pain could last years, especially under the Trump administration.
Finally, a rally is not out of the question, but thoughts of grandeur should be left by the wayside.
As long as the risks are understood, and expectations are kept in check, Tesla stock could be a bargain right now. Just be aware that the ride to profitability is likely to be turbulent.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
