TSLA: Tesla: Buy the Dip?

Tesla, Inc. (TSLA) is a uniquely positioned giant in the Electric Vehicles (EV) market. With 18% of the global EV market share, it designs, develops, manufactures, and sells electric vehicles, electric vehicle powertrain components, and stationary energy storage systems in the United States, China, and internationally. TSLA has been profitable for four straight quarters proving Wall Street analysts wrong on their expectation that it would incur losses in three of the past four quarters. And despite concerns about the negative impacts of the COVID-19 pandemic, TSLA delivered way more EVs than expected during the last quarter.

TSLA is dominating the new world of “computer on wheels,” with record revenue and income growth. In the second quarter that ended in June 2020, the company generated $6.04 billion in revenues and its EPS came in at $0.1. The company also increased the total production capacity of the Model 3 / Model Y cars from 400,000 to 500,000 units per year, during the previous quarter. The positive impact of higher vehicle deliveries, higher regulatory credit revenue, and higher energy generation and storage revenue did not fail to impress the market.

With the robust growth in the electric vehicles market, the stock gained 313% year-to-date. This impressive performance, recent developments and the potential upside based on a number of factors has helped it earn a Buy rating in our proprietary POWR Ratings system. This suggests it’s worth buying the stock on dips.

Here is how our proprietary POWR Ratings system evaluates TSLA:

Trade Grade: A

TSLA is currently trading higher than its 50-day and 200-day moving averages of $326.87 and $178.64, respectively, indicating that the stock is in an uptrend. In fact, the stock’s 83% return over the past three month reflects intriguing short-term momentum.

Strong Model Y and Model 3 demand from China and the expectation of new battery developments were the primary factors behind the stock’s gains. The company was riding strong earnings momentum and the street was expecting TSLA’s inclusion in the S&P 500 index. The stock skyrocketed further after the company announced a 5-for-1 stock split in August.

Buy & Hold Grade: C

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TSLA has decided to further dilute its shareholding by selling more stocks. The company announced that it will directly sell shares in the secondary market to raise approximately $5 billion. The stock’s decline likely reflects a continuation of a breather after gaining 821.8% in the last twelve months. In terms of proximity to its 52-week high, the stock is currently trading 16.8% below its 52-week high of $502.49.

The stock has grown more than 673% in the past two years due to its aggressive research and development expenditure, additional machinery installation to upgrade production capacity and increasing the proportion of renewable energy usage at its factories. In the second-quarter letter to shareholders, TSLA stated, “We believe the progress we made in the first half of this year has positioned us for a successful second half of 2020. Production output of our existing facilities continues to improve to meet demand, and we are adding more capacity.” However, the stock is yet to gain investors’ confidence on its potential to maintain momentum over the long run.

Peer Grade: A

TSLA is currently rated #8 out of 29 stocks in the Auto & Vehicle Manufacturers industry. Other popular stocks in the industry are Toyota Motor Corporation (TM), Ferrari (RACE) and PACCAR Inc. (PCAR). While TSLA has gained 386% year-to-date, TM generated a negative return of 7.5%. RACE and PCAR returned 15.4% and 8%, respectively, over the same period.

Industry Rank: A

The Auto & Vehicle Manufacturers industry is ranked #24 out of 123 industries. The pandemic has severely affected the demand and supply chain of the industry. Despite the decline in automotive loan originations, auto companies are able to sell vehicles at higher prices when compared to the prior year. Overall, the industry is showing positive signs of recovery.

Overall POWR Rating: B (Buy)

Overall, TSLA is rated a Buy due to its impressive past performance, short-and-long-term developments, and solid price momentum, as determined by the four components of the POWR Ratings system.

Bottom Line

The stock has soared so far this year and is dominating the headlines. The recent stock split has resulted in more retail participation. The stock may grow further based on its continued business growth, favorable earnings, production capacity and revenue outlook, but there are chances of price corrections with profit booking trends.

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TSLA shares were trading at $353.20 per share on Tuesday afternoon, down $65.12 (-15.57%). Year-to-date, TSLA has gained 322.15%, versus a 5.43% rise in the benchmark S&P 500 index during the same period.

About the Author: Sidharath Gupta

Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More...