Kicking off the month, the always polarizing Tesla (NASDAQ:TSLA) reported its fiscal second-quarter results. They weren’t great, but that didn’t stop TSLA stock from powering higher. Shares rallied some 16% and ended the week just under $350.
Some investors are wondering if this is like the most recent rally in Tesla when shares rallied from $280 in May to $370 in June before a big decline. Or is this a new rally — more sustained than the last and with new highs in sight?
Why TSLA Stock Could Soar
If the quarter wasn’t very good, then why is TSLA stock rallying so much? True, the quarter itself wasn’t great, but Tesla’s situation is now much better. Tesla may have lost $3.06 per share share, but it grew revenue more than 40% year-over-year to $4 billion.
One argument might be cash burn, as Tesla saw free cash outflow of $739 million in the quarter. However, that was much better than the $889 million outflow that analysts had expected. That doesn’t make the cash burn situation great, but it does show that some investors were too negative.
Further evidence of that relief? Tesla’s 2025 bond prices rallied several percent following the report, now trading at almost 92 cents on the dollar.
So how does this get shares to $500? Admittedly, it’s a huge price target and perhaps a bit overzealous. But the point is TSLA stock could have a lot more upside. Because the automaker isn’t producing the short-range Model 3 yet, it’s only selling high-end versions and thus, high-margin versions of the Model 3.
Some will argue that as a flaw for Tesla. The way I see it, if I can sell 50,000 high-priced cars per quarter, why wouldn’t I? The long-range, all-wheel drive and performance versions of the Model 3 start at $49,000, $54,000 and $64,000, respectively. Throw in several more thousand for Autopilot features and we have relatively high average selling prices through year-end.
CEO Elon Musk is sticking to his prior outlook, calling for Tesla to be GAAP-profitable and cash flow positive in the third and fourth quarters. The bear case isn’t out the window, but it’s tough to see what will now slow down Tesla over the next several months.
Why TSLA Stock Could Fizzle
The downsides to Tesla are obvious. Despite strong revenue growth, the company has been wildly unprofitable. It’s burned through billions in capital and until recently, has had relatively low output. That puts its valuation at a level where value investors would vomit.
Digging into the financials is even worse. Cash has fallen from $3.52 billion at the end of Q4, to $2.8 billion in Q1 to now just $2.2 billion at the end of Q2. That’s a decline of almost 40% in just six months. Total debt stands at more than $11 billion.
Looking at its quick ratio — meant to measure the financial health of the company — doesn’t suggest a good situation either. A quick ratio over 1 is reasonably healthy while above 2 is quite comfortable. Below 0.4 and Tesla’s financial health isn’t that strong. That not a surprise to anyone here – even those who are bullish on the name.
Tesla’s financial situation becomes even more questionable when backing out customer deposits, which sit at $942 million. While one could make a reasonable case for not wanting to own Tesla on these merits — I have no position, but acknowledge that they are poor — that does not mean that the stock cannot rally as its situation goes from bad to better.
Trading TSLA Stock
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So what do the charts say? Well, they could go either way. On the one hand, TSLA stock has powered through all sorts of resistance with Thursday’s post-earnings rally. That said, bears don’t lose full control — just like the bulls didn’t on the decline into the upper $200s — until Tesla pushes even higher.
Working in the bulls’ favor? Shares pushed back above $300, over an important trend-line near $325 (blue line) and above all three major moving averages.
Working in the bears favor? The $360 to $370 area has been tough resistance, while the all-time high still sits near $390, a prior double top.
It would be a crushing blow for bulls if resistance held and Tesla worked its way lower. Conversely though, shorts may have no choice but to cover if TSLA stock pushes above $360 and then up to the prior highs (dashed line). Over $390 to $400 and shorts may only add to the rally by buying-to-cover their short position. Note that there’s about a 30% short interest in Tesla, so if TSLA stock does gain upside traction, a potential short squeeze would only be fuel on the fire.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
