Event: TSLA reports its Q3 earnings on Tuesday after the close. The options market is implying about a 12% one day move, which is below the 4 quarter average of about 14%, but above the 8 quarter average of about 10.25%. Expectations are a bit elevated since the stock has moved up 14% and 24% after the last 2 earnings releases.
Sentiment: Wall Street analysts are relatively negative on the stock despite the 375% gain in 2013. They have 6 Buys, 6 Holds and 4 Sells, though the average 12 month price target is $159, right around current spot. The stock’s short interest remains quite elevated, at almost 27% of float. It has declined in 2013, but remains surprisingly high for a stock that has more than quadrupled this year. Here is the historical short interest:
Options Open Interest: Open interest is still skewed to puts by a ratio of 1.2 to 1, despite the stock’s huge rally. Recent activity has been more balanced, with calls and puts trading about the same amount over the past month. The options lines of closer maturities with the most open interest are the Dec 200 calls, the Nov15th 190 calls, the Dec 135 calls, and the Dec 135 puts. In Jan15 expiry, the Jan15 180 calls have the most open interest.
Price Action / Technicals: TSLA is well documented as the best-performing Nasdaq 100 stock in 2013. The stock is up almost 400% year-to-date, though its performance since its earnings report in early August has been much choppier. The stock is trading below its 50 day ma for the first time since March:
However, all 3 moving averages are still upward sloping, indicative of TSLA’s very strong long-term uptrend. The recent weakness in TSLA broke the important $160 support level (which hadn’t been breached since August). That leaves the $135 support level (near the July high, and low after August earnings) as the most important downside level to watch. On the upside, traders have their eye on the 50 day ma around $173, the mid-October high around $189, and the all-time high of $194.50.
Finally, the volume-weighted average price for TSLA since its September 30th all-time high is around $174.65. That’s the average entry point for dip buyers in the past month, and notable as a result.
Fundamentals: TSLA has been a battleground stock between bulls and bears for the past 6 months. The bulls have mostly won. We were quite bullish on the stock back in the spring, making a nice gain on our call spread, but missing out on much bigger gains. Our thought at the time was that TSLA was about to ramp up production of its Model S, a revolutionary car, and the technical setup looked great.
Since then, the stock has soared. TSLA has exceeded each benchmark about production (now targeting Model X production to begin in late 2014), margins (13% last quarter, targeting 19% this quarter, and 25% by the end of 2013), and profitability (expect all profitable quarters going forward).
Expectations for Q3 2013 are 0.10 per share in earnings on around $562 million in sales (compared to 0.20 and $552 million in Q2). On the positive side, one main reason for the dropoff in EPS this quarter is increased R&D, as the company laid out in last quarter’s 10-Q:
Our research and development expenses are expected to increase significantly in the third quarter as we accelerate product development efforts on Model X, Model S right hand drive, and localization of Model S for international markets. Our selling, general and administrative expenses are also expected to increase, driven by the growth in our retail locations, service centers and Supercharger facilities.
Make no mistake, this is a revolutionary company. Elon Musk has his sights set on the entire car industry, and is expanding accordingly. The real question is how to value the stock. On that front, normal revenue and earnings projections make it hard to justify $200 per share. But the bulls argue that this is no normal company, and it’s no normal growth trajectory. The high short interest indicates that there are numerous bears who disagree.
Volatility: Implied volatility in TSLA is a bit lower today than it was prior to the past 2 earnings releases (designated by E below):
However, the stock price and market capitalization are substantially higher today, generally correlated to lower volatility over time. In addition, realized volatility in TSLA stock has been at 6 month lows over the past couple months, which has reduced implied volatility ahead of tomorrow’s event as well.
Our View: We are big fans of Tesla the company, Elon Musk the innovator, and the Model S as a vehicle. As for the stock, we’re more focused on good technical setups given the difficulty of valuing such a unique company. At the time being, the stock is about equal distance from important support ($135) and its all-time high ($194.5), so we’re ambivalent about a convicted directional bet. We view the odds of rangebound price action as more likely, so we’re biased towards short volatility opportunities. Stay tuned for such structures ahead of earnings tomorrow afternoon.