Tesla (NASDAQ:TSLA) Has had a bumpy road to say the least and Tesla stock has been a lot more unpredictable than any investor wants to see.
The stock market is having its best year in over two decades, with the S&P 500 rising 18% through the first six months of the 2019 – the most the headline index has rallied through the first six months of a year since 1997. But, this rising tide has not lifted all boats.
Still, Tesla apparently didn’t get an invite to the party. As the electric vehicle manufacturer struggled with stagnating demand across the entire EV industry in early 2019, TSLA stock plunged. From $330 at the beginning of 2019, to $175 by early June.
A Closer Look at Tesla
Tesla stock has, however, staged an impressive rebound rally over the past month. From early June to early July, Tesla stock has rallied more than 30% from $175, to over $230.
The catalyst? A strong second quarter delivery report which broadly underscored that Tesla’s long term growth narrative remains in-tact, and that first quarter “Tesla demand is dying” ideologies were overstated and inaccurate.
This rebound rally in TSLA stock should persist for the foreseeable future. There is one major headwind on the horizon: another halving of Tesla’s EV tax credit in early July.
But, this major headwind should be more than offset by equally major tailwinds, including resumed secular global EV adoption, renewed China auto growth, Model S and X refreshes, and Model Y production ramp.
Overall, Tesla’s delivery volumes and trends should continue to improve in the back half of 2019. As they do, TSLA stock should stay in rebound mode, especially considering the percent of the float short stands at a 2019 high level north of 30%, setting the stock up for a nice short squeeze in the event of continued positive developments.
Secular Trends Remain Favorable
The first part of the bull thesis on TSLA stock here is that the company’s secular growth trends remain healthy and favorable.
Broadly speaking, the market dramatically overreacted to weak first quarter delivery numbers from Tesla. Those numbers were weak because:
1) Tesla was coming off a record holiday season with unprecedented demand
2) the EV tax credit applicable to Tesla vehicles was cut in half in early 2019
3) Tesla was having trouble with Model 3 delivery logistics in China and Europe, and
4) China’s auto market cooled substantially thanks to slowing economic expansion and rising trade tensions.
These headwinds didn’t repeat in the second quarter. The company removed itself from a tough holiday lap. Tesla’s EV tax credit remained stable throughout the second quarter. The company got a better handle on Model 3 delivery logistics in international markets. China’s auto market started to stabilize amid cooling trade tensions.
The result? Tesla reported record second quarter deliveries which easily topped analyst expectations, represented huge quarter-over-quarter and year-over-year growth, and comprised Model 3 growth acceleration and Model S and X decline moderation.
On top of all that, numbers from Inside EVs show that Tesla’s trailing twelve month U.S. market share grew from 55% at the beginning of Q2, to 60% by June.
In the big picture, then, Tesla remains in growth mode, and bad first quarter numbers were an anomaly produced by an unusual combination of non-repeating headwinds. Long term, this company still projects as the market leader in a potentially huge global EV market.
Second Half 2019 Numbers Will Be Good
The second part of the bull thesis on TSLA stock here is that the company’s secular growth trends will continue to improve in the back half of the year.
There is one major headwind here: the EV tax credit applicable to Tesla vehicles got cut in half again in early July. That will weigh on demand. But, that headwind is isolated. All the other factors at play here are tailwinds.
China auto market sales actually grew year-over-year in June for the first time in a year. Consumer confidence in the U.S. is sky high, labor markets are strong, and rates are low. That is a consumption combination which is highly favorable for the U.S. auto market. Further, trade tensions are cooling, and global economic data is starting to improve. Against this favorable backdrop, Tesla is refreshing the Model S and Model X later this year, and potentially starting production on its crossover Model Y.
Broadly, most factors at play in the Tesla narrative project as tailwinds for the foreseeable future. As such, the company’s secular growth trends should improve in the back half of 2019.
Tesla Stock and the Shorts
The third part of the bull thesis on TSLA stock is that, because short interest has climbed to a 2019 high, this stock has substantial upside firepower in the event that the secular growth trends continue to improve in the back half of the year.
Short interest on Tesla stock has climbed to 30% of the float. That is as high as the short interest has been in all of 2019. It’s also as high as the short interest has been since early October 2018. At that time, TSLA was trading hands around $260. By early December, the short interest had fallen to below 20%, while Tesla stock had climbed to north of $350.
Indeed, any time that the short interest as a percent of the float has exceeded 30% over the past five years, that spike in short interest has usually preceded a sizable short-squeeze rally in Tesla stock.
Thus, history and fundamentals imply that if Tesla’s growth trends do improve in the back half of 2019, this stock is due for a big short squeeze.
Bottom Line on Tesla Stock
Tesla stock was overly beaten up in early 2019. Now, it’s rebounding. This rebound will continue for two reasons. First, the company’s delivery volumes and trends will grow increasingly favorable in the back half of the year. Second, those improving trends will converge on a sky high short interest and spark a big short squeeze in TSLA stock.
The result? Tesla stock should continue to rebound towards $300 over the next several months.
As of this writing, Luke Lango was long TSLA.