7 Nov

Will Tesla Stock Still Be a Graveyard for Bears?

WRITTEN BY Mohit Oberoi, CFA

Tesla stock has been on fire since its third-quarter earnings release. Investors who were short on the stock have lost big time in the rally. Now, the S&P Global has raised its outlook on Tesla’s debt to “positive” from “neutral.” Last month, Moody’s also revised the stock’s outlook from “negative” to “neutral.”

Tesla stock

Tesla stock (TSLA) was a bears’ paradise for the last five years. If we exclude the recent rally, the stock has traded largely sideways in the last five years. Unnecessary controversies and other issues ranging from production to the supply chain have provided a lot of fodder to bears. Bulls have had periods of small victories in between. For instance, Tesla stock was higher in the fourth quarter of 2018 even though the broader markets fell. The company posted two consecutive profitable quarters last year.

Third-quarter earnings

Tesla reported a surprise profit in the third quarter. Since then, the stock has rallied sharply. After a strong October, the stock is in the green in November. Tesla stock’s strong performance has dented funds’ returns, like Greenlight Capital, that were short on the stock. The New York Post reported that Tesla shorts lost almost $1.5 billion in a day when the stock rose after its third-quarter earnings. Will the stock continue to be a graveyard for bears or will they come roaring back?

Can Tesla stock continue to be a bears’ graveyard?

Tesla is among the polarizing companies right now. Even after the company’s strong third-quarter numbers, bears might not give up hope. Notably, the fourth quarter might also be strong for Tesla. The company should benefit from higher US demand, while new pricing should help it improve its Model 3 average selling prices. Tesla might post another profit in the fourth quarter.

However, Tesla’s valuation attracts bears. The company’s market capitalization is more than Ford (F) and General Motors (GM). Notably, Ford and General Motors sell more vehicles than Tesla and are sustainably profitable. Tesla has only posted a net profit in five quarters.

Don’t compare with Ford and General Motors

Tesla fans don’t like to compare the company with established automakers. Instead, investors see Telsa in the league with technology companies. Tech stocks have a totally different valuation framework compared to the automotive sector. Some of the other listed giants like Uber (UBER) are also making losses. However, the counter-argument would be that Uber only went public this year.

Tesla’s valuation conundrum

Valuing Tesla stock has been a conundrum. Tesla is a growth company with exponential top-line growth. Also, while the company’s profitability isn’t sustainable, it expects to make profitability a norm rather than an exception. Bulls argue that the company’s autonomous technology might also be unlocked in the future. After a funding round, GM Cruise was valued at $19 billion. Tesla’s software is the company’s distinguishing factor from other automakers. Even Volkswagen admires the company’s software abilities.

Also, markets value future growth and not past laurels. Tesla’s technology and batteries might interest other automakers as well. Fiat Chrysler (FCAU) hinted that it might be interested in Tesla’s technology. Tesla CEO Elon Musk thinks that Tesla Solar could be as big as the electric vehicle business.

Bears have a point too

That was the bullish narrative for Tesla stock. However, bears have a point too. Tesla Solar hasn’t been a runaway success. Also, there are concerns that the Model 3 demand in the US might be peaking. Tesla could face some demand issues in the US market next year. The cars won’t be eligible for the federal tax credit. China’s falling electric vehicle sales are another concern for the electric vehicle industry.

Bulls and bears have enough bows in their arsenal. Even though bulls seem to have an upper hand, don’t write off bears just yet.

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