- After dropping below $US200, Tesla shares last week moved above that mark again, on news that Q2 sales would be better than Q1.
- Several years ago, Tesla endured a pattern of falling stock prices at the beginning of the year, followed by recoveries by the year-end. That pattern is reasserting itself.
- With some of the noise fading around CEO Elon Musk’s antics and the war between Tesla longs and shorts cooling off, the company’s dominant position in the EV market is becoming more important.
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Has the Tesla recovery begun? It sure looks like it, if you watched the stock price, hammered down below $US200, bounce back last week.
Who knows if shares will rally, but if history is a guide, the stock had fallen too far, too fast. Now the bargain-hunters have moved in, recalling prior comebacks.
Tesla isn’t a stock for the weak-minded, obviously. It’s wildly volatile, enduring huge swings over short periods of time. It also trades on any scrap of news that crosses the radar.
But over the years, the company has established some fundamentals. Right now, the biggest of these is that Tesla dominates the small but growing electric-car market. There are people out there who want EVs, and Tesla is there to sell them. The competition is unenthusiastic, so Tesla should enjoy this market advantage for a little while longer.
In fact, there are a few reasons why Tesla is poised for a recovery. Here’s a rundown:
1. Tesla has often rebounded in the second half of the year.
Debates around Tesla and its future have, for the past few years, centered on its stressed balance sheet, its awkward ramp-up of Model 3 production, and the erratic behaviour of CEO Elon Musk.
But back when the company was worth … about what it’s worth now, it had retreated from a high-water marker for its stock in 2014 of about $US300 and had established a routine pattern of declines in valuation at the beginning of the year, followed by recoveries as the year closed out.
Because Tesla is always in the news and because the stock is a battleground for investors, wild swings in the share price aren’t unusual. This is abnormal for the business Tesla is in – building and selling cars, where major automakers can see their shares remain flat for years – so the trick from 2014-17 was to discern a pattern that made at least some sense.
That was the only way you could figure out if Tesla was just slightly overvalued or wildly overvalued. By the same token, big sell-offs for Tesla were sometimes overcooked. The classic example was a big drop after Tesla acquired SolarCity in 2016.
Savvy investors who thought the deal wasn’t going to kill Tesla bought when shares we’re below $US200 and enjoyed a run to nearly $US400, prior to the stock’s retreat in 2018 and collapse in 2019.
Lo and behold, Tesla is once again rebounding as we prepare for the second half and for the car maker’s report on second-quarter vehicle deliveries. Tesla has been telegraphing that deliveries should be a big improvement over the first quarter, which was a big drop-off from a robust close in 2018.
That speculation has pushed shares above $US200 again, an important level of support for the stock. A decent Q2 should send the stock back toward $US250. History has taught Tesla investors that they really don’t want to miss the rallies, which tend to be dramatic.
Deliveries for Q2 should also set the stage for what could well be a return to profitability by Q3 or Q4 (Q2 is staging for a loss). The final quarter is typically Tesla’s biggest, so no surprises there.
The takeaway here is that we’ve seen this movie before. The difference is that we’re now watching it for the first time again after Tesla’s nightmarish 2018 and early 2019.
2. Musk has been chillin’.
Compared with 2018’s orgy of Twitter-enabled madness, Musk has more or less stuck to his knitting in 2019.
Some of this has been ironically the result of short-sellers getting the better of him. They have been winning, so they have less incentive to provoke, and that has given Musk less to react against.
Musk has also been busy with his other company, SpaceX, which recently launched a small constellation of internet satellites. Rocket science is hard – and time-consuming.
Additionally, Musk has been pushing Tesla in a heads-down, get-it-done direction, akin to how he ran the company in the second half of 2018, when it surged to a profit.
3. Tesla is consolidating its dominance of the electric-car market.
The electric-car market is tiny – only about 1% of global sales – but in the US, it’s growing, and much of the growth is being captured by Tesla.
Edmunds.com estimated that Tesla’s May sales were up 71% from the same month last year, by far the largest increase among companies selling vehicles in the US. In fact, Tesla is one of the key reasons why the US auto market continues to run at near-record sales levels after four years.
There’s a bit of a misunderstanding about other automakers’ desire to compete with Tesla. In a note to investors last week, Morgan Stanley analyst Adam Jonas pointed out that, in May, Tesla likely sold three times as many cars as other companies with EVs on the market. Essentially, Tesla has an EV monopoly.
The “competition” doesn’t really care. They aren’t making very many EVs, firstly because they aren’t seeing a particularly big market for them yet, and secondly because they haven’t figured out how to make money on the per-unit basis. Much of their EV efforts right now are really preemptive of what they assume will be more stringent government emissions regulations in the future.
Of course, people don’t not want to buy EVs, and for them, Tesla is increasingly going to be their first stop. In practical terms, that means Tesla should enjoy increasing revenue over the short term.
4. Tesla negatives are wearing thin.
The Model 3, Tesla’s theoretically mass-market sedan, endured the worst birth of any vehicle I’ve ever seen in the car business.
Tesla tried to push a massive number of vehicles through a poorly designed production system, broke that system, and then had to improvise. At one point, some of the most expensive Model 3 variants were being built on an assembly line under a tent in Tesla’s parking lot. Henry Ford wouldn’t have recognised the setup.
The resulting vehicles had some issues. That’s nothing new for Tesla; every vehicle it’s developed has suffered from early-production snafus. They have usually taken about a year to sort out.
Ditto the Model 3. The more cars on the road that don’t have problems, the less likely Tesla is to be fighting daily customer-relations battles. The Model 3, like the Model S and the Model X before it, is a pretty good car. Not perfect, but plenty satisfying for most owners.
This isn’t to say that Tesla doesn’t have some challenges ahead. But the first rule of business in the auto industry is that your customers, most of them, have to love what they drive.
5. The ultra-bulls are being discounted.
Tesla’s daffier boosters – ARK Invest, with its wild $US4,000 price target recently bumped up to $US6,000, for example – are engaged in a sort of marketing-as-performance art. The daffiness gets them headlines and TV spots, which in turn pumps their businesses, or at least brands them.
Financial markets, meanwhile, continue to grapple with what a reasonable valuation for Tesla could be, assuming some robust future growth but nothing Earth-shaking, despite Musk’s predictions about millions self-driving robotaxis.
For the remainder of 2019, that puts Tesla in a $US200-$US400 trading range. That’s good news for the company’s business because it anticipates a staunching of the red ink. It’s bad news for the ultra-bulls because it implies that Tesla would have to abandon a solid business to embrace a colossally expensive and uncertain new one.
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