Tesla has been in the news this week, for two very different reasons. First, the stock made a new all-time high, surpassing the late February “GigaFactory Spike” levels that capped a 130% move from the November lows. The other was a fairly mixed review from Consumer Reports, suggesting that the Model S, per CNBC.com:
has “more than its share of problems” and despite what they say was a “smoothness, effortless glide and cleaver, elegant simplicity, there are quirks that might dampen consumers’ experiences”
Investors seem to care little about what Consumer Reports thinks of the Model S as the stock remains at these new highs, which by the way is up 74% on the year. We have been huge fans of the story, the cars and the potential for the underlying technology, not only for cars, but we have like most others been waiting for a a meaningful pullback below $200 to get involved on the long side. Good thing we have not been holding our breadth.
Fundamentally, we reconsidered the valuation situation in TSLA a long time ago, as this is one of the rare cases where the company might change the market rather than be forced to conform to it. If near-term valuation weighs heavily on your thesis, either long or short, than you are not likely thinking about things correctly as no sane investor who is value oriented is looking at today’s P/E. Put another way, TSLA is expected to have $3.8 billion in sales this year, trading at market cap of $32.5 billion (or about 8.5x sales), while GM is expected to have $157 billion in sales, and sports a market cap of $54.5 billion (or about .33x sales), and Ford with expected 2014 sales of $139 billion and a market cap of $67 billion (or about .48x sales). You get the point, it would take some extraordinary growth for a very capacity strapped TSLA to ever grow into its valuation in typical auto stock terms. Valuation cannot be a pillar of either the bull or the bear case – the long-term innovative potential (or possible future failure) is what investors are trying to gauge. Most importantly in our view, can battery technology develop sufficiently to compete on cost with traditional autos in the next decade?
Most technicians have their eye on the potential for a double top, while many looking to get involved on the long side would love to see a pullback towards the prior breakout level from early February near $200, which also corresponds with the stock’s 200 day moving avg (yellow and circled below):
There is something else that caught my eye – ownership of the stock and options open interest. It is well known that short interest is amazingly high for a large cap company, with almost 30% of the shares sold short. On the flip side of that is a large concentration of top holders, with CEO/Founder Elon Musk owning close to 23% of the shares outstanding. So you have a scenario where Musk will never sell and many investors likely see the large short interest as a benefit to the stock at these levels as the continual covering and re-shorting fuels the bullish fire.
Looking at options open interest, it is interesting to note that of the top 12 largest strikes of open interest, 8 of the strikes are all worthless puts in January2015 expiration:
Looking at the next 12 largest lines of open interest, again you see a lot of way out of the money puts that are near worthless, with a smattering of upside calls, but sporting much lower totals than that of those when investors were speculating or hedging at much lower prices:
So my take-away, at least from an options standpoint, is that to some degree longs look like they have stopped hedging in a meaningful manner, and given the stock’s incessant upward movement, it appears that the short term movements are in day trader’s hands as longs have made their bets in the stock and seem fairly content, while shorts just come in and out of the stock.
And lastly what strikes me is that implied vol (the price of TSLA options) is at a 2 year low. So for those who are long and feeling a little fat and happy, it could be a perfect time to consider stock replacement, or protection:
The low level of implied volatility indicates that options traders don’t expect a huge move even on a breakout in TSLA in the coming weeks. TSLA has typically made a big move on a breakout in the past 2 years, so that adds to the argument that options are priced too cheaply with TSLA at a technical inflection point.
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