Tesla (NASDAQ:TSLA) stock has taken a dip. The electric-vehicle maker saw its share price fall from $264.88 per share down to as low as $222.25 last week following a disappointing earnings report. With investor sentiment negative, the TSLA bears may be vindicated.But is this just a short-term dip? While Tesla’s performance over the last quarter failed to meet expectations, Tesla’s production and sales continue to rise.
TSLA stock is down 27% in 2019 It seems as if the Tesla bears are finally having their day in the sun. But are the bears misguided?
Is TSLA at a turning point that will lead to profitability? Let’s take a closer look at TSLA stock, and see whether we can determine its future direction.
A Closer Look at TSLA
While Tesla’s performance improved in Q2, it failed to meet expectations. The company posted quarterly revenue of $6.35 billion, lower than analysts’ average estimate of $6.4 billion. But its sales climbed 40% quarter-over-quarter, and 59% year-over-year.
It delivered 95,356 vehicles in Q2 (setting a company record), and production reached an all time high of 87,048 vehicles. The company also posted positive EBITDA (earnings before interest, taxes, depreciation, and amortization). Specifically, Q2 EBITDA came in at $370.3 million, compared to a loss of $28.5 million in the first quarter of 2019.
Tesla stock has two key catalysts in the pipeline. The first is the Shanghai “gigafactory.” The Chinese facility is projected to open later this year. Expanding operations into China is a game-changer for Tesla stock. TSLA anticipates the facility could produce up to 150,000 vehicles per year. With the Model 3’s Chinese base price set at around RMB 328,000 (~$47,653), the gigafactory will be a shot in the arm for the company’s global sales.
The second catalyst is the launch of the Model Y in America. The Model Y is anticipated to hit the streets in the fall of 2020. A compact SUV model, the Model Y has a large potential market. Targeting the high-margin SUV market is the right move for the company. I can see this vehicle enabling Tesla to become a top brand amongst the “mass affluent.”
Risks to the Bull Case on TSLA
The TSLA bears make a strong case. The company continues to depend on dilutive equity sales and convertible debt offerings to fuel growth. Tesla boosted its cash reserves by $2.35 billion thanks to a recent offering. Tesla believes it has the liquidity to fund both Chinese Model 3 production and US Model Y production. But will it need to raise more money?
Given Tesla’s track record, I can see the company talking a big game, but having to sell more equity to meet its goals. On the other hand, I could see the Tesla bears eating crow on a small amount of good news. The company is targeting “positive GAAP net income” starting in Q3 With TSLA in such murky waters, what should investors do with Tesla stock? Should investors consider buying Tesla stock on weakness or should they wait until the shares drop further?
All Bets Are Off
Until we see Tesla’s Q3 earnings (scheduled to be released in October), all bets are off. The TSLA bulls have a solid case. In the next year, the company’s sales could skyrocket thanks to the Model Y and the opening of the gigafactory. The company could start posting consistently profitable results. This will give credibility to the current valuation of Tesla stock. On the other hand, the TSLA bears make cogent arguments of their own. The company’s valuation is largely built on high expectations. If TSLA fails to deliver, the bears’ day in the sun could continue.
So what’s the verdict on TSLA stock? Tesla stock trades at a premium valuation to its automotive peers. That’s understandable, given the company’s disruptive powers. But it is not as if the major car makers aren’t in the electric vehicle game themselves. Once electric vehicles become viable without the help of government tax credits, the major auto names may have the edge in selling affordable electric cars to the masses. But that may not hurt Tesla stock. TSLA is not looking to become the next Ford (NYSE:F) or Toyota (NYSE:TM); it’s gunning for the mass affluent market.
But in terms of Tesla stock, I am on the sidelines. I learn towards the bears, but can easily see the stock jumping on crumbs of good news. I also believe Tesla stock price could capitulate, as we saw earlier this year (when TSLA fell from over $300 per share to under $200 per share). With a plethora of other growth stories out there, investors may be better off skipping TSLA stock in favor of other opportunities.
As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.