Tesla Stock Is All About the Forest, Not the Trees

Persistent headline risks make Tesla stock turbulent, but the big picture remains favorable.

Here's How Tesla Can Change Its Narrative

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Yet again, just when it seemed like Tesla (NASDAQ:TSLA) was out of the penalty box and gearing up for a major rally to the upside, a Black Swan emerges and drags Tesla stock back down.

A few months ago, Tesla impressed investors with strong second quarter numbers and a reaffirmed guide regarding Model 3 production and Q3 profitability. Tesla stock soared. Then, everything went haywire after CEO Elon Musk sent the now infamous “funding secured” tweet. Tesla stock initially popped. Then, it dropped in a big way as legal and corporate governance issues weighed on investor sentiment (an SEC lawsuit didn’t help things).

This time around, the story almost happened the same way.

Tesla impressed investors with strong third-quarter numbers, which included a big profit and a reaffirmed guide regarding sustained profitability next quarter. Tesla stock soared. Then, it dropped immediately after the Wall Street Journal reported that the FBI is probing the company regarding potential misstatements on Model 3 production. The bulls were able to overcome this pullback, however, and Tesla stock has been up since.

In the big picture, the SEC lawsuit and FBI probe are just noise. Investors who chose to focus on this noise aren’t seeing the forest through the trees. Sure, in the very big Tesla forest, there are a few rotten trees that will create near-term turbulence. But, the forest is quite promising, as essentially every big idea trend is moving in favor of Tesla.

As such, I’ll let the stock have its wild swings based on bad reactions to individual trees, all the while paying attention to the forest. So long as this big picture remains promising, I intend to keep my core TSLA position, add to it when the market freaks out on bad headlines, and sell some when the market explodes with euphoria on good headlines.

Don’t Pay Much Attention to TSLA’s Bad Trees

The one thing that is a certain in Tesla stock is that the drama will continue.

With Tesla, you have a company that is trying to upend a decades-old automotive industry and quite literally change the world. You have a genius, innovative and brazen CEO with a loud mouth and quick temper. You have a bunch of well-respected yet equally loud-mouth shorts, and a high-profile battle between those shorts and the CEO. There is also the huge revenue growth and slim profit margin dynamic, which excites growth investors and gives value investors fits. And, now you have legal headaches.

Presumably, none of those aforementioned dynamics will change any time soon. Thus, Tesla stock is one defined by persistent headline catalysts, both good and bad ones. At any point, you could get a notorious short-seller doubling down in an interview. Or, you could get the opposite where a short-seller switches sides, as Citron Research did recently. You could get SEC lawsuits. Or, you could get settlements. Both of those have happened over the past few weeks.

The sum of all these headline catalysts is just noise, and long-term investors would be wise to be mindful of it, but mostly ignore it with respect to the long-term thesis.

Lawsuits will come and go. It is highly unlikely that any of them inflict any serious and lasting damage to Tesla or Elon Musk. Short-sellers will also come and go.  They won’t have much effect on the long-term fundamentals. Tweets will keep happening. Some will be good. Others will bad. None of them will impact the long-term thesis.

Instead, all those headline catalysts do is cause sharp and often unsustainable moves in Tesla stock. Over the past several months, as the volume of these headline catalysts has grown, each hugely positive headline catalyst has been a near-term selling opportunity, and each hugely negative headline catalyst has been a near-term buying opportunity. As such, headline catalysts are near-term buying and selling opportunities, but don’t do much in the way of long-term opportunity.

Pay Attention To The Forest

When it comes to the long-term core thesis on Tesla stock, investors would be wise to focus on the big ideas.

The big ideas here are the global electric vehicle (EV) revolution, falling EV production costs, improving profitability, Model 3 production ramp, Tesla market share gains, new Tesla EVs road-map, and robust Tesla EV demand. All of these big ideas are trending in the right direction for Tesla.

The global EV revolution is just starting to go mainstream. Global EV market share is growing globally at an accelerated rate, but remains below 2% essentially everywhere except Norway and the Netherlands. Legislation is also progressing globally to promote more widespread EV adoption. Thus, it looks like the EV industry has explosive growth ahead of it over the next several years.

EV battery costs have dropped 80% over the past six years, and will likely keep dropping. Tesla just scored a huge profit in Q3, and projects to be consistently profitable going forward. Model 3 production is ramping with exceptional pace, and the Model 3 was the fourth best selling car in the U.S. in September. Amid Model 3 ramp, Tesla is clearly gaining market share as most every other car saw unit sales drop in September while Model 3 and Model S unit sales both rose by a considerable margin.

Beyond the Model 3, Tesla is already making preparations for Model Y production in Shanghai. And, importantly, all signs point to still strong Tesla EV demand. Other car sales are largely dropping. Tesla sales are rising. Less than 20% of Tesla’s massive Model 3 reservations were cancelled despite an unprecedentedly long wait. Long-term, Musk said on the recent conference call that 500,000 to 1 million cars per year is the long-term global demand target for Model 3.

Overall, all of these big idea trends are moving in the right direction for Tesla. Ultimately, that means Tesla stock will head higher in the long run. Thus, exacerbated near-term rallies and drops are simply near-term buying and selling opportunities.

Bottom Line on TSLA Stock

When it comes to Tesla stock, you have to see the forest through the trees. Tesla stock is subject to persistent headline risks which will create turbulence in the stock. But, such turbulence simply provides near-term buying and selling opportunities. Longer-term, Tesla stock will head higher because all of the big-idea trends are moving in favor of Tesla.

As of this writing, Luke Lango was long TSLA. 


Article printed from InvestorPlace Media, https://investorplace.com/2018/10/tesla-stock-is-all-about-the-forest-not-the-trees/.

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