Tesla (TSLA) went on a monster run since hitting a low point in mid-March, energized by a strong second-quarter earnings report and a stock split. Now, having pulled back from its recent peak and third-quarter earnings on Wednesday, is Tesla stock a buy?
The second-quarter earnings report was the fourth-straight quarter of profitability for Tesla, a requirement it needed for being admitted to the S&P 500, which many expected.
It was among the reasons Tesla stock than doubled since July 1. In addition, Tesla stock got another jolt after it announced a 5-for-1 stock split on Aug. 11. Trading began on a split-adjusted basis on Aug. 31.
However, Tesla stock cratered on Sept. 8 after it was denied entry into the S&P 500.
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Battery Day Fails To Excite
Tesla held its highly anticipated Battery Day on Sept. 22 that failed to meet the heightened expectations of Wall Street analyst, resulting in another sharp drop in Tesla stock. The company outlined how they plan to both increase the range and reduce the cost of a new generation of batteries. But it didn’t give the instant gratification the audience wanted, pointing instead to more complex, multi-year goals.
There was no mention of a million-mile battery that many analysts had anticipated. However, Tesla said the improvements in battery technology will enable it to launch a low-cost Tesla down the road.
“About three years from now, we’re confident we can make a very compelling $25,000 electric vehicle that’s also fully autonomous,” Chief Executive Elon Musk said at the event. He said Tesla can achieve a 54% gain in driving range. In addition, it also targets a 56% reduction in cost per kilowatt-hour.
Wall Street analysts wrote about the event with differing views. But one thing seemed clear: Tesla did not exceed expectations.
“While we applaud the company’s ambitious plans, we believe it is an inherently risky move with steep execution and operational challenges,” Needham analyst Rajvindra Gill wrote in his report to clients.
Quarterly Results Beat Estimates
There was plenty of good news in Tesla’s second-quarter earnings report for investors to chew on.
The company reported second-quarter earnings of $2.18 per share on revenue of $6.04 billion. Wall Street expected a loss of 12 cents on revenue of $5.12 billion, according to FactSet.
This happened despite its main manufacturing plant in Fremont, Calif., was shut down for about six weeks during the quarter. That was due to local officials mandating the closure as the coronavirus was in full swing.
The company also said the Model 3 has received a strong reception in China. It makes the Model 3 at its factory in Shanghai. Tesla is also in the process of building a plant in Berlin, and another near Austin, Texas.
Tesla reports third-quarter results reports late Wednesday. Wall Street expects adjusted earnings to jump 49% to 55 cents per share as revenue grows 30% to $8.2 billion. Tesla delivered a record 139,300 vehicles globally in the third quarter, surpassing expectations and driven by demand for the mass-market Model 3 sedan and new Model Y crossover. Production at Tesla’s plant in China was a key element in beating expectations.
Continuing To Build Capacity
Musk wants to eventually build 20 million electric vehicles a year over the next decade — more than double the current production of other auto-making giants — so it’s now on a mission to rapidly expand its manufacturing capabilities. Tesla stock has soared this year in response, but there could be a rough road ahead for the company.
Tesla took a big step with its third manufacturing plant, where construction is now underway near Berlin. That plant is expected to be completed in March 2021, where it will produce the Model Y.
Then in July, Musk confirmed that its fourth manufacturing plant would be built near Austin, Texas. That factory will be Tesla’s largest, built on a 2,000-acre chunk of land. It will produce the Cybertruck and its big-rig truck called Semi, as well as the Model Y and Model 3.
When Tesla starts pumping out cars in Germany, it will go head-to-head in electric vehicles with three established German names: Volkswagen Group (VWAGY), BMW (BMWYY) and the Mercedes Benz division of Daimler AG (DDAIF). It will be a tough battle as all three car companies have reputations for quality cars.
Other serious competitors include Ford Motor‘s (F) Mustang Mach E, the I-PACE from Tata Motors‘ (TATA) Jaguar unit and the Audi eTron. Audi is owned by Volkswagen. Volkswagen’s Porsche arm also has the Taycan.
Tesla Stock Gets High Composite Rating
The IBD Stock Checkup tool shows that Tesla has a strong IBD Composite Rating of 99 out of 99. The rating means Tesla stock currently outperforms 99% of all stocks in terms of the most important fundamental and technical stock-picking criteria.
The stock also has a Relative Strength Rating of 99. The rating tracks market leadership. It shows how a stock’s price movement over the last 52 weeks measures against that of other stocks.
Tesla’s relative strength line is currently on a downward slope, a negative sign. The relative strength line tracks a stock’s performance vs. the S&P 500 index. Typically, the RS line of the strongest stocks is either confirming or leading a stock’s price into new high ground.
In the stock market, timing is critical. So when you’re looking for stocks to buy or sell, it’s important to do the fundamental and technical analysis that identifies lower-risk entry points that also offer solid potential rewards.
Outlook On Tesla Stock
Tesla stock is currently not a buy, but keep an eye on it.
Shares are just 12% off its record high, with a 502.59 buy point. The buy point extends to 527.72
The new base is fourth stage, following advances from cup-with-handle bases and a high, tight flag that also counted as a base. So, the latest pattern has higher risk. In addition, stocks can move sharply up or down on an earnings report.
Please follow Brian Deagon on Twitter at @IBD_BDeagon for more on tech stocks, analysis and financial markets.
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