Tesla (NASDAQ:TSLA) has become the ultimate battleground stock. Both bears and bulls are very emotional when it comes to Tesla stock. Many resort to irrational claims and ideas as they dig their heels in.
It’s been a vicious environment, and guess what?
Neither side has been right!
TSLA stock is flat over the past 12 months and up about 13% over the last five years. A month ago, that five-year return was approximately 0%.
Compare that to the S&P 500 ETF (NYSEARCA:SPY), which is up 8% in the past year and roughly 60% in the past five.
There’s a serious disconnect here for both parties. Tesla has neither gone to the moon like bulls thought, nor has it gone to zero like seemingly every perma-bear has pleaded.
So what now?
Breaking Down Tesla Stock
For me, Tesla is one of those “look, don’t touch” stocks. Meaning, it’s an exciting and entertaining company to follow, but not necessarily a stock I want to put my money in. It has a polarizing CEO and state-of-the-art cars, but it also has a problem generating free cash flow, while that polarizing CEO can run afoul at times.
After a capital raise earlier this year, Tesla is well funded. It can finish building out its Gigafactory in Shanghai and pour more funds into expansion and product development. But if it can’t generate consistent free cash flow and profits, then what good is TSLA from an investment perspective?
Then there’s consideration from a valuation perspective. TSLA shares are anything but cheap. At current prices, Tesla stock commands a $46 billion market cap. That’s about two times 2019 sales. However, valuing TSLA on cash flow and profits is a bit harder, since they are inconsistent at best and non-existent at worst.
In my view, Tesla has more upside than companies like General Motors (NYSE:GM), Ford (NYSE:F) and others. That does not mean it has a superior business model or financials. But even if Tesla does grow into its potential, how much room does its valuation allow the stock to expand?
Perhaps one could make an argument that TSLA may command a valuation like Ferrari (NYSE:RACE). But Ferrari is an automaker unlike most others. It does not aim for the masses and has a very passionate customer base. Tesla too has a passionate customer base, but it is aiming for the masses.
For Tesla, it really boils down to consistency. It needs to consistently expand (or maintain) margins, its free cash flow and profits.
Without consistency in its fundamentals, Tesla, at least to me, is simply a company to cheer for but not one to invest in at this time. Automakers are tough investments to begin with and the volatility in Tesla’s financials doesn’t help matters.
Trading Tesla Stock
TSLA stock is coiling just beneath $260. On the charts, that lands it just below a critical level over the last seven months but puts it over the 200-day moving average and 61.8% retracement.
While the stock fell about 50% from peak to trough, the decline didn’t give bears the satisfaction they were looking for. Particularly now that TSLA has bounced back by more than 45%.
After the latest rally, both camps seem convinced the next “big move” will be in their favor.
If TSLA can move back over $260, it puts the 50% retracement near $278 on the table. Above that and $300 is possible.
It’s worth pointing out that Tesla stock is over the $240 to $250 zone, which is a critical long-term area as it was range support for a number of years before giving way in April.
Should the 200-day, $260 and the 61.8% retracement prove too difficult for TSLA to penetrate, let’s see if uptrend support (blue line) and the 50-day moving average can buoy the name. Below that and the 78.6% retracement near $220 is on the table.
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.
