TSLA Q1 Earnings Preview

by Enis May 7, 2014 10:33 am • Commentary

Event:  TSLA reports its Q1 earnings today after the close.  The options market is implying about a 10% one day move, which is slightly below the 4 quarter average of 15.5%, but above the 8 quarter average of about 11.5%.

Sentiment:  Despite the fact that TSLA has nearly quadrupled in price in the past year, Wall Street analysts are not bullish on the stock as a group.  There are 5 buys, 8 holds, and 4 sells on TSLA, with an average 12 month price target of $223.  Short interest in TSLA remains elevated, at 31% of the outstanding float, though it has come down from near 40% of the float at the start of 2014.  TSLA is already up 44% so far in 2014.

Elon Musk owns 23% of the outstanding shares, and Fidelity is the second largest owner, with nearly 10% ownership.

Options Open Interest:  Total open interest is slightly skewed towards puts, with a call to put ratio of about 0.85.  However, the one month average daily volume has slightly favored calls by a ratio of 1.05 to 1.

There are only five strikes near current spot that have over 5k of open interest:

-May17th 200 puts

-Jun21st 200 puts (the most open interest, with over 13k)

-June 200 calls

-Jan15 200 calls

-Jan15 200 puts

Clearly, the 200 strike is of significant interest to traders.

Price Action/Technicals:  TSLA has been very volatile so far in 2014, with a low of $137 in mid-January, and a high of $265 in late February, and now trading around around $200.  The 1 year daily chart shows that the stock remains in a long-term uptrend, above its rising 200 day moving average, though its 50 day moving average has flattened out:

TSLA daily chart, 50 day ma in pink, 200 day ma in yellow, Courtesy of Bloomberg
TSLA daily chart, 50 day ma in pink, 200 day ma in yellow, Courtesy of Bloomberg

The crucial area to watch on the downside is $190-$195, which coincides with TSLA’s fall 2013 highs, and has acted as support ever since the stock broke out to a new high in mid-February.  Below that, the 200 day moving average is now around $175.

On the upside, the 50 day ma is around $222, and the early April high is around $235.  Of course, the big upside level is the all-time high of $265 from late February.

Fundamentals/Valuation:  We noted in last quarter’s earnings preview that TSLA was a particularly difficult company to value since so much of the expected long-term cash flow from the company was still a decade or more in the future.

In the meantime, investors and market participants have traded the stock based on the latest headlines.  Tesla’s Gigafactory announcement in late February popped the stock to a new high, but new buyers did not step in, and the stock is down almost 20% since then.

The overall progression of the company, stock price aside, has been impressive.  GS Research noted the many positives from an April meeting with management:

The biggest surprise for us was the company’s own expectations for the Model X which has seen a significant rise in reservations on a global rotation to SUVs and whose volumes management believes could match the Model S. An all-new drivable prototype of the redesigned X should be out in 4Q14. The Models S build out is progressing well at a production rate of about 700 cars per week, which Tesla expects to step up in 2H with increased cell capacity by Panasonic and the introduction of a second S/X production line. There were press reports saying that Panasonic may be pulling out of the gigafactory. While the partners have not officially responded to the media reports, Tesla management categorically dismissed that any aspect of its commercial relationship with Panasonic has changed. Management appears to be sticking with its 6,400 delivery number for 1Q14, although we note registrations appear higher.

In addition, Tesla expects a $35k baseline mass market car out in 2017, which would be a much larger potential market than its current luxury lines.

Even with all of the business positives, the rich valuation is the main reason why even normally bullish Wall Street analysts are lukewarm on TSLA’s stock.  For our part, we view TSLA as more of a technical trading vehicle than an investable fundamental story for now.

Volatility:  Implied volatility in TSLA has actually come down over the past couple of weeks ahead of the earnings announcement, as options traders have tempered their expectations for a big move on the event:

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

The 10% implied move is lower than both the 4 quarter and 8 quarter averages.  In addition, TSLA is more than 20% away from a new all-time high, which has also likely depressed call demand ahead of this earnings announcement.

Our View:   TSLA has been a darling stock for more than a year, and Elon Musk has captured the hearts and minds of investors around the world.  His accomplishments are admirable and very impressive, and many view a bet on TSLA as a bet on Musk.  

BUT, as much as we would like to join in the Musk Lovefest, TSLA is pricing in an awful lot of good news here.  The stock peaked on its GigaFactory announcement in late February, after which Morgan Stanley research came out with a TSLA Utopia research piece that reeked of analyst pandering rather than fundamental research.  In any case, we love TSLA the company, and greatly admire Elon Musk the entrepreneur.  TSLA the stock, though, appeals to us much less.

Perhaps if TSLA corrects through time or price in the coming months and years, and the business continues to expand as expected, we can get more excited about the stock’s long-term prospects as an investment.  In the short-term, technicals are our main guide.  At the moment, the stock looks rangebound, but our main concern is the price action in other momentum stocks.  TSLA’s high short interest (still around 30%) has likely supported the name more than other former high fliers.  Regardless, we’d only get interested on the long side for a potential trade on a test of the rising 200 day moving average, now around $175.  As for the short side, the high short interest and Musk’s habit of newsworthy announcements makes any short in TSLA an unappealing affair.

In sum, TSLA is not a standout situation on fundamentals, technicals or volatility, in either direction, so no plans for a new position here, though we will keep our eye on it if the situation changes.