$TSLA Q4 Earnings Preview

by Enis February 18, 2014 11:36 am • Commentary

Event:  TSLA reports its Q4 earnings, Feb. 19th, after the close.  The options market is implying about a 12% one day move, which is slightly below the 4 quarter average of 15.5%, but above the 8 quarter average of about 10.75%.  TSLA first went public in mid-2010.

Sentiment:  Wall Street analysts have been mixed on TSLA throughout the stock’s 435% return over the past year. There are 7 buys, 5 holds, and 3 sells on TSLA, with an average 12 month price target of $161.  Short interest in TSLA remains very elevated, at 37% of the outstanding float.  In fact, total short interest in TSLA approached its all-time high in January, just short of its 32.3 million share high from the spring of 2013:

TSLA short interest, Courtesy of Bloomberg
TSLA short interest, Courtesy of Bloomberg

The total float in TSLA is only 79.4 million shares, though here are 122.6 million shares outstanding.  Elon Musk owns more than 28 million shares, or about 23% of the company.

Options Open Interest:  Total open interest is slightly skewed towards puts, with a call to put ratio of about 0.9.  However, the one month average daily volume has favored calls by a ratio of 1.5 to 1, as TSLA stock has rallied more than 30% since the start of 2014.

There are only two strikes that have over 10k of open interest:

-Feb22nd 200 calls

-Mar22nd 200 calls

In Jan15 expiry, the 200 calls are once again the line with the most open interest.

Price Action/Technicals:  After TSLA’s IPO in mid-2010, the stock essentially traded in a range between 20 and 40 in 2011 and 2012.  When the stock finally broke above $40 in the spring of 2013, it was off to the races for TSLA.  As a result, the 1 year daily chart captures the relevant action in TSLA over the last year.

The stock has not looked back since that breakout above $40 last spring.  TSLA is making a new all-time high this morning:

TSLA daily, 50 day ma in pink, 150 day ma in yellow, Courtesy of Bloomberg
TSLA daily, 50 day ma in pink, 150 day ma in yellow, Courtesy of Bloomberg

The September 2013 high of $194.50 (red line) was broken last Monday, on decent volume.  The stock has held a couple of tests of $194.50 since then, and gapped higher this morning.

The rising 50 day and 150 day moving averages are both in the 155-170 area, which is now important support on the downside after the mid-January move higher in TSLA shares on the news of better-than-expected Model S deliveries for the 4th quarter.

Fundamentals/Valuation:  Tesla is a very difficult company to value since so many investors are interested in the long-term prospects of the electric car as a disruptive technology, rather than simply the discounted cash flow valuation of the company.

As for earnings, analysts expect 1.53 in earnings in 2014, 3.09 in 2015, 5.13 in 2016, and 7.28 in 2017, though 3 years is an eternity for Tesla.  Therefore, in TSLA’s case, the long-term earnings potential is the key for the stock.

TSLA is now a $25 billion market cap company, about half the size of the American giants, Ford and GM.  Of course, TSLA’s main attraction to investors is its significantly higher margins, and potential scalability for a mass market car in the future, given the technology.

At the January automotive conference in Detroit, Tesla detailed its potential plan for the mass market car.  Here was GS research:

On the Gen 3 the company stated it intended to keep the price of the vehicle essentially unchanged in the mid $30k range, despite the fact that the Federal Buyers Credit will expire putting the additional burden on cost performance. Key cost drivers are reduced components costs through volume discounts, design improvements, fixed cost leverage and of course improvements in the powertrain where the company expects an annual cost reduction of 5-10% a year. Ranges being debated for the Gen 3 are 200 miles, 300 miles and even possibly a 400 mile variant.

Once again, the actual details, both financial and technological, will be crucial to the success of TSLA.  For now, speculation reigns.

Volatility:  Implied volatility in TSLA is a bit lower than usual ahead of the earnings event, compared to the prior 3 earnings releases, when 30 day implied vol was between 80 and 90:

30 day implied volatility in TSLA, Courtesy of LiveVolPro
30 day implied volatility in TSLA, Courtesy of LiveVolPro

A big reason why TSLA implied volatility is lower is that there is less uncertainty surrounding the earnings event after TSLA disclosed in mid-January its 4th quarter car deliveries of nearly 7,000 Model S cars.  Moreover, Elon Musk has continued to be quite vocal about the car and the company’s strategy in the past month.  

Given that the stock is at an all-time high, the stock might actually be more volatile after earnings if the stock goes higher on the earnings event, rather than lower.  Regardless, the 50 level is likely a spot to buy implied volatility in TSLA if it gets there.

Our View:  Elon Musk is truly a modern-day pioneer.  Investors in TSLA have significant confidence in Musk’s ability to deliver on his promise of revolutionizing the car industry.  In the past year, the success of the Model S has been reinforced that confidence.

Surprisingly, sentiment surrounding TSLA shares remains quite negative, exhibited by the stubbornly high short interest.  The valuation is obviously rich, but for a momentum name with an innovative technology like TSLA, investors are much more interested in sales growth and technological momentum.

While we don’t have a strong directional view, the high level of implied volatility despite the pre-announced sales guidance could make calendars interesting, as one of our subscribers pointed out in our Your Questions Answered section this past week.