This Was Then, This Is Now: How to Trade Tesla

I haven’t written a serious article focusing on Tesla (TSLA) since 4/21, the morning after the Q1 numbers were released. The shares closed at $1,071 before earnings and would trade up to $1,092 that day. Those of you with really keen memories will remember that I arrived that morning abbreviating the name…small for trading overnight, not from any place of belief. This short was soon covered. If I only knew I had a tiger by the tail back then.

Last Friday night, stocks closed at $703.55, up 13.4% from late-May lows but still about 39% below April highs. A lot has happened in between, from CEO Elon Musk’s adventures in potentially acquiring Twitter (TWTR), a perpetual underperformance of social media, to Musk’s “super-bad sentiment” about the economy expressed in an email on last week where he also announces that “Tesla will reduce the number of salaried employees by 10% as we are overstaffed in many areas”.

Musk further confuses him by announcing that the 10% reduction doesn’t apply to anyone who actually builds cars or batteries or installs solar power. Musk made sure hourly workers knew that this kind of headcount would increase. Oh, and you may have seen the comments about getting remote workers back to the office.

look back

Remember, Tesla exceeded expectations for the first quarter. The company reported adjusted EPS of $3.22 (GAAP EPS: $2.86) on revenue of $18.76 billion. The adjusted bottom line number outperformed Wall Street by more than a dollar and the top line impression was good for 80.6% annual growth. Automotive revenue increased 87% to $16.86 billion, of which regulatory credits accounted for $679 million.

Automotive gross margin expanded to 32.9% from 26.5% for a year ago comp. Total GAAP gross margin increased from 21.3% to 29.1%, while adjusted EBITDA margin improved from 17.7% to 26.8%. Net cash from operations increased 143% to $3.995 billion, generating free cash flow of $2.228 billion. That number rose by a “mere” 660% over the same period last year. In short, Tesla hit the ball out of the park in his first quarter.

You will remember this…

… Tesla produced 305,407 vehicles during the quarter, while delivering 310,048 and said it still expects to achieve an average annual growth of 50% in vehicle deliveries. Of course, Tesla stipulated that the growth rate would depend on this ability and efficiency of the company’s operations, as well as the stability of the supply chain. That stipulation, with shutdowns in China, would obviously persist into the current quarter and likely beyond.

Look forward

For the current quarter, a consensus of 22 Wall Street analysts is for adjusted EPS of $2.15 within a range of $1.65 to $3.00, with revenue of $18.1 billion within from a range of US$15.9 billion to US$20.75 billion. In consensus, the quarter would be good for 48% year-over-year earnings growth and 51% revenue growth. It’s about overcoming supply constraints and keeping factory doors open while trying to keep expenses low as Tesla navigates the second half of the second quarter. Obviously, there’s some pressure, as Musk is openly speaking or writing about the difficult environment.

Fundamentals

Tesla reported first-quarter free cash flow of $2.14 per share. There were four consecutive quarters of positive free cash flow and seven out of eight. That left Tesla with a pretty impressive balance sheet. The company operated with a net cash position of US$18.013 billion, inventories of US$6.691 billion and current assets of US$29.05 billion. This compared well to current liabilities of $21.455 billion, which left the company with a healthy current ratio of 1.35. Even without the entry of inventories, the company would have a quick index of 1.04.

Total assets of US$66.038 billion easily surpassed total liabilities minus equity of US$30.632 billion. That liability number includes $2.253 billion in long-term debt and $2.714 billion in capital leases. The company could pay for all of this today out of its own pocket, if it chose to do so. Tesla ended the quarter with a tangible book value of $32.46 per share, easily the highest TBV per share in the company’s existence.

New news

On Monday morning, according to Dow Jones, in a letter from Elon Musk’s attorney Mike Ringler to Twitter, Musk said he believed “Twitter is transparently refusing to fulfill its obligations under the Fusion”. This refers to Musks’ request for more data on the number of spam and fake accounts on the social media site.

The letter also states, “This is a clear material breach of Twitter’s obligations under the merger agreement and Musk reserves all resulting rights, including his right not to consummate the transaction and his right to terminate the merger agreement.”

Wall Street must now ponder whether this goes to court, if Musk moves to terminate his deal to acquire the company… .

My thoughts

This chart is still sending a lot of mixed messages. Obviously, the stock is mired in a downtrend, with the lower trend line falling faster than the upper one. Relative Strength enters the new week at a neutral reading, while the full stochastic oscillator is already close to looking overbought. The daily MACD offered a bullish crossover from the 12-day EMA over the 26-day EMA, but both averages remain deeply negative.

That said, as far as the risk/reward proposition goes, while always risky, there’s a lot less risk and a lot more reward visible in the 57 prospective gains that the stock traded this morning than the 92 times it traded on 04/21 .

While I’m still a little uncomfortable at 57 times, I’m more than prepared to play that name on the long side for trading purposes already this morning as I incrementally build up an investment-focused “main” long position. Stocks need to retake the 21-day EMA at $758. This is the first key and can act as a pivot. The second step would be approaching the Fib level at $858, but we are not going to get ahead. Tesla is still far from correcting the downward slope of the 50-day SMA ($892). I think I can be patient with that. As the CEO inferred, the economy seems to be on my side.

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