$TSLA Q1 Earnings Preview

by Dan May 4, 2016 12:37 pm • Commentary• Trade Ideas

Event: Tesla Motors (TSLA) reports Q1 earnings tonight after the close. The options market is implying about a 9% one day move which is rich to the 4 qtr avg of about 7% but close to the long term average since its 2010 IPO of about 11%.  Heading into TSLA’s Q4 print on February 10th (that day the stock closed at $143.67, just above its 52 week lows, and about 60% lower than current levels) the implied move was 15%.  

Price Action / Technicals: Despite the massive rally off of its pre-earnings 52 week lows in February, the stock is still down about 5% on the year, and down 16% from its 2016 highs.

As I write, TSLA is resting on its 200 day moving average, an important technical support level:

[caption id="attachment_63378" align="aligncenter" width="600"]TSLA 1yr chart from Bloomberg TSLA 1yr chart from Bloomberg[/caption]

A longer term view since its mid 2010 IPO reveals massive volatility bands since 2014 (when it first crossed the $20 billion market cap bound, it is now a 31b company) Since then it has had $10 billion market cap swings on more than a couple occasions.  The recent inability to make a higher high, resulting in the second lower low since its all time highs in 2014 may suggest that the stock is in the process of making a rounding top:

[caption id="attachment_63379" align="aligncenter" width="600"]TSLA since June 2010 IPO from Bloomberg TSLA since June 2010 IPO from Bloomberg[/caption]

Sentiment: Wall Street analysts remain fairly mixed on TSLA shares with 10 Buy ratings, 5 Holds and 6 Sells, with an average 12 month price target of $262, 15% above where the stock is currently trading. Short interest is at about 29% of the float, or about 29 million shares, very near the 29.5 million shares, or 22% of outstanding shares held by founder and CEO Elon Musk.

Options Volatility Snapshot: Short dated implied volatility (the price of options – blue below) at 55% is well above the 2016 low of around 40%, and well below the February all time high at 91%. The spread between at 30 day at the money IV vs 30 day realized volatility (how much the stock is moving- white below) is at a fairly wide spread, with realized vol about 35%, very near the 2016 lows:

[caption id="attachment_63380" align="aligncenter" width="600"]From Bloomberg From Bloomberg[/caption]

If the quarter is uneventful, short dated options prices will likely come back in to the mid 40s.

Total options open interest is fairly even at 287,000 calls vs 295,000 puts, and interestingly, 4 of the 5 largest strikes of open interest are way out of the money calls, with the largest, 14,000 Jun 395 calls, 9,000 of the June 400 calls, 9,000 Jan17 490 calls and 8,800 of the Jan17 300 calls.  On the put side, the three largest strikes of open interest are also way out of the money, with 11,900 of the Jan17 50 puts, 7,700 of the Jan18 50 puts, and 7,300 of the Jan17 100 puts.

My View Into the Print:  The big story that drove the stock from $140 in early February to above $260 last month, wasn’t the Model S, X, gig-factory or stationary storage, those were all so 2015. It was the company launching their mass market Model 3. They hope to begin shipping the Model 3 in late 2017. And for a company in need of cash to build out their ambitious production plans on multiple fronts, the pre-orders for the Model 3 have allowed them to raise close to $400 million in zero interest loans from prospective buyers who plunked down $1,000 for the right to pay a minimum of $35,000 at some point in the distant future.  For all intents and purposes, that was a coup for a company that in almost every year since going public in 2010 has done an equity or debt raise, and might have put off a capital raise, but a dilutive raise is always a risk to the stock in the near term.

Given how the company guided down Model S deliveries on at least a couple occasions last year, I would expect similar this year as the company struggles to mass produce the more complicated Model X SUV.

The stock’s nearly 10% decline in the last week makes for a difficult set up into the earnings report, coupled with the fact that options market makers seem a tad less worried about a big move vs heading into the last earnings report. The stock might have found support at its nearly converging 50 and 200 day moving averages, just above what looks like very healthy support at $220:

[caption id="attachment_63382" align="aligncenter" width="600"]From Bloomberg From Bloomberg[/caption]

On the downside, $220 to $200 is fairly important support:

[caption id="attachment_63383" align="aligncenter" width="600"]From Bloomberg From Bloomberg[/caption]

We will circle back with some trade ideas into the print for those that are long, wish to be long, or want to define risk short.