The Market Is Looking at Tesla Stock All Wrong

History says a profit in Q3 or Q4 could spark a huge run in TSLA stock

Tesla Ends Year With More Than 3,000 Model 3s Still in Inventory: Electrek

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Never a dull day for Tesla (NASDAQ:TSLA) stock. A few weeks ago, Tesla’s celebrity CEO Elon Musk flirted with taking Tesla stock private at $420 per share, and Musk communicated that idea unexpectedly through Twitter (NYSE:TWTR). The tweet came after he slammed Wall Street analysts on a conference call and engaged in Twitter warfare with multiple critics.

Now, only days after hiring investment bankers for the potential go-private process, the deal is off. Citing the fact that most shareholders did not want the company to go private, Musk called off all go-private plans.

Through all this, Tesla stock has been taken on a roller coaster. It bounced from $300 to $350 after better-than-expected second-quarter numbers and a reaffirmed strong back-half guide. Then, TSLA stock roared to $390 after Musk’s tweet.

The stock dropped to $300 rather quickly thereafter as the market questioned the legitimacy of Musk’s “funding secured” claim. TSLA stock rebounded from that sell-off to $325 when Tesla started hiring investment bankers. Now, TSLA stock is dropping back to $310 with the go-private deal off the table.

In other words, TSLA stock has been perhaps the market’s most wild stock over the past month.

Amid all this noise, the fundamentals have been somewhat overlooked by go-private chatter. Those fundamentals have dramatically improved. Namely, Model 3 production rates are ramping, demand and public awareness are as strong as ever and profitability looks like a real possibility in Q3.

Thus, while there will be a hangover effect on TSLA stock from all this go-private drama, the improving fundamentals will win out in the long-term. I think that by the end of the year, TSLA stock will head towards $400.

Model 3 Production Rates Are Improving

Tesla’s biggest hiccup over the past several quarters has been sluggish Model 3 production. That appears to be changing.

According to Bloomberg, Model 3 production rates have steadily improved since June, and Tesla is now consistently producing 5,000 or more Model 3 vehicles per week (except for the last week of August, where production fell to 4,500, likely weighed by surrounding go-private drama).

If Tesla can maintain this strong rate of production, then that is a huge step forward for TSLA stock. No one is else mass producing an electric vehicle of this caliber or style. Thus, Tesla achieving mass production of the Model 3 will not only allow the company to finally meet robust demand but also puts the company far ahead of the competition when it comes to mass EV production.

Consequently, so long as these Model 3 production rates continue to improve, I think Tesla stock can head higher.

Demand & Public Awareness Are High

Another important factor in Tesla’s fundamentals is demand. And, when it comes to demand and public awareness, Tesla is proving the old adage right: there is no such thing as bad publicity.

Although Musk and Tesla have been in the spotlight for controversial reasons over the past month, they have both been in the spotlight. Google search interest trends have been heading higher recently for Tesla, Elon Musk and Tesla Model 3. Clearly, brand awareness for the company, its CEO, and its mainstream product are about as high as ever.

Is that a good thing? Perhaps.

Having sky-high public awareness correlate with sufficient, ramping production capability isn’t a bad thing.

Moreover, multiple reports point to Model 3 production ramp corresponding with huge market share gains for Tesla in the auto-market (see here, here and here). Despite the troubled headline risks, Model 3 production ramp has been met with equally large demand, and Tesla is gaining significant share.

I think demand will keep heading higher. Young investors are gobbling up TSLA stock amid all this noise.

I suspect that is because most young investors attribute a high brand value to Tesla. Keeping in mind that today’s young investors are tomorrow’s big consumers, this high brand value perception should be a leading indicator for big long-term demand.

As such, I think Tesla demand and public awareness remain high, and that production ramp will allow Tesla to keep gaining market share.

Profitability Around the Corner?

With production ramping and demand presumably still very large, Tesla could realistically net a profit in Q3 or Q4. If that does happen, then bears could be in trouble.

Tesla has netted a profit only twice before in its public history. The first time was in May 2013. The second time was in October 2016. Both times, TSLA stock rocketed higher afterwards and reached a new permanently higher plateau. The May 2013 report basically sparked a run from under $50 to over $200. The October 2016 report sparked a run in TSLA stock from $200 to $300.

In other words, history says that when Tesla reports a profit, TSLA stock goes on a big multi-month run. Thus, if Tesla reports a third or fourth quarter profit (which is possible given Model production 3 ramp and still strong demand), TSLA stock could rally from $300 to $400 and up rather quickly.

Bottom Line on TSLA Stock

Forget all the go-private drama, and focus on the fundamentals.

Right now, the fundamentals on Tesla stock are improving, and there is a realistic opportunity for Tesla to turn a profit in the back-half of the year. That profit could spark a huge rally in TSLA stock, and as such, I think TSLA stock could finish the year around $400 or higher.

As of this writing, Luke Lango was long TSLA. 

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