We had a reader ask us about Tesla (TSLA) and we thought it was an interesting enough name to talk about. I warned readers of this blog several times in late 2020 and early 2021 that the stock had probably seen its best days. Please don’t take this as a comment against the cars, or the company. Great innovation, great company, and Elon Musk, in my view, is a rock star genius. But, we separate the wheat from the chaff on this blog by agnostically looking at markets and stocks through analytical eyes. We only care if the stock is worthy of owning from a risk/return point of view. So – is TSLA a buy or a sell?
To address this question, I have some fundamental comments from Craig, along with some interesting commentary taken from a BearTraps research report, and finally, both an investment sentiment perspective and my technical observation on the stock. These are the 3 pillars of the ValueTrend system, as taught in my Online Course. Lets get at it.
BearTraps research notes
“It is very strange that Apple and Tesla seem to be unaffected by what is happening, both have large China and Europe exposure. The Nasdaq is down 3% this month and Tesla up 13%? it just shows that although people talk about sentiment, speculation remains much stronger than people are willing to admit. Hard to think this is consistent with a (market) low.”
“I love how Tesla talks about increasing production in Germany just as Germany can barely keep the lights on and Switzerland tells people to conserve by showering together. Make it make sense, please!”
Fundamental notes from Craig
Tesla has certainly been, and continues to be, a disrupter in an a long established industry. It has been the biggest new player to break into the club in decades. It is growing cashflow faster than sales. From that viewpoint, the company really is running on all cylinders (pun intended). All of these good things have led the market to give it a valuation that is extremely impressive (read: expensive).
Here’s what Craig is referring to: Assuming TSLA has sales this year of $85 billion, the current market capitalization of $965 billion indicates a price to sale of 11.4x. Assuming net income this year of $14.2 billion, the current market cap is pricing a forward earnings multiple of greater than 60x. Quite rich for an automobile company! Which begs the question: Is Tesla more than a car company? We ask this because, quite frankly, Tesla is no longer a stand-alone when it comes to advanced EV design and engineering. Big players with innovative ideas are catching up. Will TSLA be considered an automotive stand out, worthy of high valuation and leading growth in the future? Especially as other auto makers play catch-up….
For example: Currently, the market is evaluating an IPO for the iconic brand Porsche. In some of Porsche AG marketing/ prospectus materials it clearly states their intention to, “transform to be leading provider of software based-mobility.” While the deal may not be pricing quickly, it is clear they are cashing up to help fund and prepare for a BEV future. * BEV- Battery Electric Vehicle. But its not just Porsche. All auto companies have set aggressive targets to increase their electric vehicle line-up. These companies are probably willing to lose money for a while to support these efforts. After all – the government will (supposedly) support them.
Craig feels that Tesla’s advantage of being first to the party will diminish as the big auto makers start to compete. Tesla is not Apple. They have not developed their own ecosystem. The premium valuation is not justified, unless they are able to block out both competing auto and battery makers far into the future. And that’s not likely going to be the case
Technical analysis of TSLA chart
The weekly chart below shows a clear sideways pattern that has trapped the stock since 2021. Support levels of around $200, and resistance of around $380 are containing the stock. Sure, the stock has done better than the SPX and NASDAQ this year. But from a longer point of view, most of the good times for TSLA’s trend ended 2 years ago. Longer termed investors are better to wait for a breakout before buying.
Sideways stocks like TSLA are amongst the easier patterns for traders, mind you. The chart currently suggests a neartermed (stochastics) overbought level BUT, one that has yet to hook down. Meanwhile, the longer viewing momentum studies like RSI and MACD are in a nice uptrend with some room to move before they hit overbought levels.
Below is a chart of Sentimentrader.com’s optimism index. It looks at:
- Trading activity in put options versus call options
- Future volatility expectations
- Average discount to NAV (if a fund)
- Short interest
- Analyst rankings
- Price behavior
The chart show us the corresponding peaks within the two year sideways trend, corresponding with investor optimism. Note that TSLA is approaching, but not at, that extreme optimism point just yet. This implies the potential for that last move up on the stock to hit resistance, per my comments above.
All in, as a risk-adverse trader, I would probably wait on this stock, despite the potential for another $70-$80 gain. I like buying closer to the bottom of a range with a newly-minted bullish hook on momentum indicators before buying. More risk-inclined traders could try to get that last move on the stock, so long as they kept tight stops. Do keep in mind, from a fundamental perspective, we would not buy this stock in our conservative Equity Platform. We consider overpriced stocks like TSLA best for aggressive strategies such as our Aggressive Platform. We do not own TSLA in that platform at this time.
Hope this blog helps those who are curious about the prospects of TSLA.