In the back half of September, I said the best strategy with Tesla (NASDAQ:TSLA) stock as it closed in on $300 was to sell in September, and buy back in October. Now, more than ever, I maintain that stance.
By the looks of it, October is setting up to be a breakout month for this stock. SEC headwinds are now behind the company and its celebrity CEO, Elon Musk. Meanwhile, in early October, Tesla will likely report blowout third-quarter delivery numbers that wow investors and send Tesla stock soaring.
Then, in late October or early November, Tesla will likely report a profit in its Q3 earnings report, a catalyst that could send Tesla stock to a new permanently high plateau around $400.
Overall, I think October could be a breakout month for Tesla stock. For the past several months, $300 has been the key level for this stock. Dips below $300 have been opportunities to buy. Rallies above $300 have been opportunities to sell.
Not this time. There are major fundamental catalysts on the horizon that could forever change the narrative surrounding this company and its future. Those changes will be for the better. If those narrative shifts materialize as I expect, then the new key level for Tesla stock in a month will be $400, not $300.
Q3 Delivery Report Will Be Strong
The one major headwind weighing on Tesla stock was an SEC lawsuit that was announced last Thursday against Musk. Tesla stock dropped big on the news as investors feared about the future of Musk with the company. Bearish takes included Musk being forced to step away from the company for a prolonged period of time, or Tesla being hit with huge financial charges.
Two days later, all those concerns went away, and without much of a financial hit. On Saturday, news broke that Musk had settled with the SEC for $40 million ($20 million from Musk and $20 million from Tesla). Musk would have to step down as chairman, but would remain CEO of Tesla. In other words, all that really changed was Musk and Tesla losing $40 million, which is chump change in the bigger picture.
With the SEC headwind in the rear-view mirror, Tesla investors are now hyper-focused on the Q3 delivery report, due sometime this week. The consensus belief is that the delivery numbers in that report will drop some jaws. Musk has said before that the company is set to deliver twice as many vehicles in Q3 as they did in Q2. Meanwhile, independent production trackers show that Tesla figured out its production issues early in the quarter, before slowing production toward the end to focus on deliveries.
All of this is good news for Tesla. From a fundamentals standpoint, one major thing holding Tesla stock back was an inability to produce and deliver Model 3 vehicles quickly enough to meet mass market demand. If the Q3 delivery report is as robust as Musk implies it will be (80,000 or more vehicles), then that will be a huge step in the right direction for the Tesla narrative.
If the narrative does shift toward, “OK, this company has Model 3 production and delivery figured out,” then Tesla stock will take a meaningful leg higher.
Earnings Will Be a Game-Changer
The ability to produce and deliver Model 3 vehicles en masse is a positive development for Tesla stock. But, a bigger positive development is the ability to produce and deliver Model 3 vehicles en masse and at a profit.
It is no secret that Tesla has a problem with profitability. During its entire life as a public company, Tesla has reported a profit only twice before. The first time was in May 2013. The second time was in October 2016. If you look at a long-term chart for Tesla stock, you will see that there have been two huge rallies since the company went public. The first started in May 2013, when Tesla stock went from $50 to $200. The second started in October 2016, when Tesla stock went from $200 to $300.
In other words, the two biggest rallies in this stock’s history were a result of the company netting a profit. The same thing could happen this time around with Q3 earnings.
Musk has previously promised a profit in Q3 or Q4. In a recent memo to employees, he doubled-down on that promise, saying that Tesla is “very close” to making a profit. If this is true, and Tesla shows a profit in Q3 on robust production and delivery numbers, Tesla stock could soar like it did in May 2013 and October 2016. We are talking about a big rally that would most likely put Tesla stock up and over $400.
Bottom Line on TSLA Stock
The next month is very important for Tesla stock. Either the company reports outstanding Q3 numbers and Tesla stock finds a new permanently high plateau at $400, or the company fails to live up to the hype and Tesla stock drops.
At this point in time, I think the former has a far higher probability of happening than the latter. As such, I’m a buyer of Tesla stock here and now, and believe that $400 prices are reasonable by mid-November.
As of this writing, Luke Lango was long TSLA.