Yesterday we previewed Tesla Q3 earnings, due today after the close. Here was our view on possible stock reactions:
My View: On Oct 2nd TSLA announced that they had delivered 11,580 cars in Q3, which included the initial launch of their much anticipated Model X suv, which should reduce some of the mystery, but Q4 guidance will likely be key to see how the roll out of the Model X is affecting deliveries across the company’s entire portfolio, all of which are made in the same factory. The stock is down 13% since pre-announcing Q3 deliveries as the stock has seen a very prompt sentiment shift in the last month, as Consumer Reports took off their recommendation of the Model S after news of reliability complaints.
I am not one who cares to focus on the stock’s egregious valuation, there is little justification for the stock’s $28 billion market cap, a company which loses money, is bleeding cash, and only sold 33,500 cars last year and is only expected to sell 55,000 this year.
The TSLA story is really about broadening out from luxury electric cars like the Model S, D & X, and moving towards volume production of their planned mass market Model 3 that they promise will cost less than $45,000 and the proliferation of stationary storage. For all of this to happen TSLA needs to complete the build out of their multi-billion battery factory. A factory the company will need to fund through continued debt issuance and/or dilutive equity issuance.
There seems to be growing expectations that the company will lower their Q4/full year 2015 delivery estimate as complications with Model X could have slowed current deliveries.
All that said it seems there is a good bit of bad news built into the stock as we head into tomorrow’s earnings.
We’ve loved the Tesla story for years and we still believe in Elon Musk’s ultimate vision. But that doesn’t mean we think the stock is a buy and hold at these valuations. The company has a lot to execute on in the next few years, and any missteps will send the stock into sizable correction. Therefore, if you are a long term holder of the stock it makes sense to protect your positioning on occasion. As we said yesterday, a lot of bad news is in the stock at the moment. It’s down from a high near $280 over the Summer and hasn’t shown very good relative strength over the past month as the broader market has rallied from its August lows.
Stock Alternative/Replacement – Buy the TSLA ($211.50) Nov 210/235/260 call fly for 6.25
Rationale – This trade defines risk to 6.25 and targets its mid point (and max gain) right where the 200 and 50 day moving averages converge. Its potential payout is 18.75 at that point. The risk here as a stock alternative is if TSLA squeezes much higher than that because profits begin to trail off above that mid point. Those looking to avoid that situation may want to do the 210/240 call spread outright. That’ll cost about $11 with a payout potential of $19. Of course, your breakeven is even higher than the fly and you’re buying more elevated vol, but there’s no fear of actually losing money on a massive move higher.
Hedge vs Long Stock – Against 100 shares of TSLA ($211.50) Buy 1 Nov6th weekly 200 put for $4
Rationale – If you’re long TSLA and want to be able to hold it long term you should protect yourself at potential breakdown levels into volatile events. You want to lose this $4 with the stock higher, but be glad you had it just in case. The weekly 200 puts protect you at the breakdown level of $200 (where there is no support below, for a long way). The weeklies make sense just to play the event itself as dollar cheaply as possible.
Directional – Calendars
Bullish: TSLA ($211.50) Buy the Nov6th/December Regular 230 call calendar for 4.40
Bearish: TSLA ($211.50) Buy the Nov6th/December regular 190 put calendar for 4.10
Rationale – Vol is pumped and it’s a tough way to make a living picking a direction using long premium strategies into an earnings event. For those with a directional inclination, and think the stock could move in line with the implied earnings move, then one way to express this view is with a calendar, selling the weeklies to own December. Both of these trades finance December with a sale of about 2 dollars in the options expiring this Friday. The ideal situation for these trades is for TSLA to move in line with it’s implied move and have the weeklies expire near worthless. Massive moves in either direction put these trades at risk, but you are only risking the premium spent for the structure.