Why does Tesla Inc. attract so much investors’ attention?

Tesla Inc. is an American electric vehicle (EV) manufacturer and clean energy company founded back in 2003 in Palo Alto, California. The company designs, develops, manufactures, leases, and sells electric vehicles, energy generation units and storage systems internationally. Through the strategic acquisition of SolarCity in 2016, Tesla Inc. also secured a prominent position in the solar panel and solar roof tile manufacturing market.

Investors have been continuously drawn to the stock in recent years, as the company has managed to establish itself in their minds as something more than an EV manufacturer. Tesla is now considered to be a global technological innovator as Elon Musk has been revolutionizing both the electric vehicle and the general auto markets right in front of our eyes. We believe that Tesla is in the process of modernizing and upgrading the old fashioned automotive industry the same way like Amazon and Netflix have done with the retail and entertainment industries in the last 5-10 years. The more people start to realize that, the better the company will perform and the higher the stock will go.

In the last 8 years Tesla has not only developed, popularized and expanded the electric vehicle market but it has also solidified a dominating position in it. Tesla is the market leader in battery-powered electric car sales in the United States, owning around 60% of the market share. In fact, the company’s flagship Model 3 accounts for about half of the U.S. EV market. And while a lot of the critics of the company continue to say that the electric vehicle (EV) market is too small in comparison to the general auto market, Tesla has managed to increase its revenues with the staggering 5,951% since 2012 and now has market capitalization almost double the combined value of the top two U.S. auto giants General Motors and Ford.

The debate among analysts, experts and the general public regarding Tesla’s long-term growth prospects, business development, management capabilities etc. has been quite intense for years now. However, we must never forget that every company that challenges the status quo by offering a different solution than the one that has been around for tens or hundreds of years will face a lot of adversity at first. People will question the need or the usage of its products, doubters will talk against the company, expenses will be piling up while revenues and earnings might be slipping, regulators and competitors will do everything they can to bring it down as they have no interest in the status quo being disrupted. However, nothing can stand in the way of progress, evolution and scientific advancement when it is for the betterment of us as a civilization and sooner or later things take their natural course – changes are made, innovations are accepted and we become better and more efficient as a society. Without people like Elon Musk – visionaries, innovators, dreamers and disruptors – we would still be communicating primarily via the post mail, riding horses to work, and using candlesticks to light our way. Think about that and remember that 50 years ago, no one believed that the things you use and do in your everyday life today were ever going to be possible.

The big profitability problem for Tesla is now resolved

With all of that explosive growth, innovation and impressive leadership how is it possible for someone not to like the stock, right? Well, the main problem for Tesla since the very beginning has always been the company’s inability to generate a profit. The continuous increase in the company’s high R&D, SG&A costs and massive capex had generally outpaced the remarkable revenue growth trajectory, which in turn had put Tesla in a position to rely on the relentless financial support of its CEO and to further accumulate substantial amounts of debt. An over-leveraged balance sheet creates a financially unsustainable model for every company, as you can take as much debt as you want but ultimately if your business is not generating profits, then it would continue to get harder and harder for you to cover your monthly interest expenses, until one day you go bankrupt.

Hundreds of experts have been trying to predict the exact timing for the downfall of the world’s largest electric vehicle manufacturer in the last decade and with some solid reasoning too, but Tesla has continued to push year after year on improving its manufacturing process, making its vehicles more reliable and increasing its popularity among the end consumer. Persistence, hard work and a never giving up mentality are usually considered as the 3 most important determinants for success and the team at Tesla definitely possesses all three of them. Every company is only as good as the management team and the employees that stand behind it and looking at Tesla we could easily categorize the team factor as one of their strongest sides as a company.

After almost two decades of continuously operating at a loss, it seems that Tesla has finally broken out of that negative pattern with its third consecutive earnings report beat announced on April 29th 2020.

The most essential and heavily anticipated piece of information for the company came out in late April, with the release of the Q1 2020 earnings report. The report has once again reassured Tesla’s investors that the days of no profitability and no income are over, as the company generated $16 million in Net Income for the first quarter. We believe that this is the end of the no profitability era for the company and signals that the stock could be poised for substantial gains in the months and years to come. We at DowExperts believe that if investors had the willingness to buy into the stock before, despite the lack of profitability, then the recent historic and positive shift in the earnings trend will now bring substantial capital inflows to the stock in the weeks and months ahead.

Manufacturing improvements, capacities and new product development

Tesla’s mission is to accelerate the world’s transition to sustainable energy through increasingly affordable electric vehicles and energy products. To ramp production to 500,000 cars per year, Tesla alone will require today’s entire worldwide supply of lithium-ion batteries. Thus, the Tesla Gigafactory was born out of necessity and will supply enough batteries to support Tesla’s projected vehicle demand. Today, the Gigafactory produces Model 3 electric motors and battery packs, in addition to Tesla’s energy storage products, Powerwall and Powerpack.

The company has built 3 of its famous Gigafactories in Nevada, New York and Shanghai and is now currently building a new one in Berlin. It is clear that Tesla is taking its leadership position in the EV niche market very seriously and is not going to allow any production restraints or deficiencies to hurt the company’s growth trajectory. The large investment in developing the right infrastructure that will be able to handle the expected surge in demand for the company’s products in the coming years shows that Tesla is ready for the future. Are you ready for what’s coming?

The development of Tesla’s product line up has also continued to improve with new, faster, more reliable and better-looking vehicles (Model S, Model X, Model 3, and Cybertruck) being presented in recent years. It seems that slowly but surely things are starting to take off at Tesla as the company published a document on April 2nd stating that it had produced almost 103,000 vehicles and delivered roughly 88,400 vehicles in the first quarter of 2020 – a record performance on both fronts for the period. The rise in Model 3 deliveries, which forms the bulk of Tesla’s overall deliveries, is aiding the company’s top-line growth. Notably, Tesla reported stronger-than-expected deliveries for the first quarter due to record levels of production from the new Gigafactory in Shanghai. The company’s upcoming product launches, including Tesla Semi Truck, are expected to further boost prospects.

Technical Analysis

The technical chart of the stock shows a remarkably volatile price action in the last 10 trading weeks with huge appreciations and even steeper declines. Tesla’s stock has always been considered as a rather speculative play for growth oriented investors, thus people who are familiar with the stock are no strangers to volatility. However, the moves that we have observed recently have really set some records for the stock. After the company announced its 2nd consecutive earnings beat back on January 29th with its Q4 2019 earnings report and also gave an upbeat future guidance for 2020, the stock skyrocketed from $600 to $967 in two trading sessions. Soon after that astronomical 61% gain the stock started retracing and dropped to the $690-750 levels at the end of February, and looked quite comfortable there. However, the stock was then dragged lower with the rest of the market in March as a result of the global pandemic COVID-19 outbreak. The stock broke the initial horizontal support lying at $686, the secondary support at $542 and then proceeded its decline through the $455 tertiary support level to only stop at the 200-day moving average at the $350-360 zone. The company’s market capitalization lost 63% of its value in 4 weeks.

However, after the precipitous declines in March, the broad market started to find its footing which of course helped Tesla to also start recovering as well. The stock managed to form a strong bullish trend throughout April as we saw the stock breaking the prior key support levels, which were now playing the role of resistances at $455, 542 and $686 respectively. Tesla topped around the $870 mark on April 30th, and has started to retrace again. Since then, the first support at $686 has already been tested in the first trading days of May, and so far it seems to be holding nicely. However, Tesla as every other stock out there is strongly influenced by the broad market sentiment and when we see investors shifting from a risk-on to a risk-off mindset, then this could signal potential problems for a growth stock like Tesla! We can clearly see that the RSI has formed another lower high and is currently turning lower, which is a signal of a fading bullish momentum at the current price levels. The Bollinger Bands are also indicating that the most recent peak at the $870 level was relatively weaker and lower with respect to the Bollinger Bands than the prior strong appreciation to the $770 mark.

As we discussed in our ETF Correlation Analyses for the month of May, currently we see a broad cross-sector weakness which has been confirmed by our unique multi-layered correlation confirmation approach using 18 different charts (6 ETFs and 12 individual stocks). As you know in order to further strengthen our Full Company Analysis and give our followers the ability to position themselves in the right way for the month, we always select 2 of the major ETFs that we follow and compare their price charts with the one of the stock that we are analyzing. Thus, creating an objective and thorough investment analysis for our followers. The ETF’s that we have chosen to compare Tesla’s price chart with are the SPY and XLK. Our rationale comes from the fact that while Tesla is a car manufacturer it trades more like a tech stock in terms of P/E valuation, growth rate and overall investors sentiment. Thus, we chose the Technology Sector ETF – XLK as it offers a fairly broad exposure to the US technology segment and SPY as it is the best-recognized and oldest ETF and it tracks the massively popular US index, the S&P 500.

SPY

The recent strong appreciation was capped by a multitude of different resistances lying around the $280-300 zone – the 50 and 200-day moving averages sitting respectively at $275 and $300; the 61.8% Fibonacci key retracement level at $293 as well as the strong horizontal and psychological resistance sitting between the $300-305 levels. Thus, we are seeing the SPY currently being in the process of forming a bearish reversal of last month’s price action. Let’s also not forget that we saw a bearish cross over to the downside of the 50-day and 200-day moving averages back in March, which will keep the overall sentiment rather bearish until we see the 50-day MA move back up above its 200-day counterpart. The RSI is also showing weakness as it has failed to break the important level of 60 twice in the last two weeks and is now in the process of turning lower. The strong support levels on the downside for the SPY where we expect the price to find some serious buying interest are $263, $245 and $230 respectively. We at DowExperts see a strong probability for the price to re-test the first ($263) and potentially even the second ($245) support zones in the coming weeks, but we see it as highly unlikely for the price to break down towards the third support at $230.

After rallying for 25-30% in April we at DowExperts believe that the next 1-2 weeks will put some downward pressure on the market. The driving force behind this expected short-term decline would be a combination of a profit taking interest and also the fact that investors would actually start to realize how terrible the recent economic reports from the US have actually been.

XLK

The technical chart of the Technology Sector ETF looks a little bit better than the SPY chart, as a result of the fact that last month’s rally was led by the technological stocks out there which were making the biggest gains. However, even though that the most recent uptrend has not been broken yet, the price has approached a critical resistance on a low volume and with a relatively weaker RSI reading, which is an early indication that there are troubles coming for the ETF. Additionally, we should always remember that the SPY and XLK share a very strong 10-year positive correlation of 89%, which following DowExpert’s investment philosophy means that if one of the two ETFs issues a signal there is an 89% probability that the other ETF will follow suit. Thus, we believe that the broad economic weakness in the US and the uncertainty surrounding the process of re-opening the economy, as well as the potential risks of another surge in the number of new infections will be the driving fundamental forces behind the markets next move lower. As a result of that, we expect the XLK to move lower in the coming weeks with initial downside targets at the $83-85 levels. The initial trigger line for us would be the breaking of the diagonal upward sloping uptrend support at around $92 (the blue line), which we expect to happen next week. This will open the door for revisiting some of the lower support levels. In case the price breaks below the $83 support zone, then we could expect a further depreciation towards the $75 mark.

Conclusion

We are long-term buyers of Tesla’s stock as a result of the great fundamental positioning that the company has, as we believe that it is poised to benefit from the accelerated demand for the company’s products in the coming years. Additionally, the fact that the company has finally managed to become profitable and is now consistently delivering strong financial results is another great indication for the bright future ahead for the stock. However, following our cross-sector, multi-layered confirmation correlation model we have concluded that Tesla Inc. (TSLA) will give our followers a better entry point for them to open their long-term buy positions in the stock, in the next few weeks.

Thus, we would be interested in buying the stock on any pullback towards the $686 support level and will look to further add to our exposure to the stock in case the price revisits the next support zone around the $542. Our mid-term targets will be placed at the $890 and $995 marks respectively, with our extended long-term take profit levels positioned at the $1150 and $1220 per share.

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