What Are The Catalysts For Tesla Stock’s Next Big Rally?

by Trefis Team
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Tesla stock (NASDAQ: TSLA) has underperformed this year, declining by almost 10% year-to-date, compared to the S&P 500 which is up by over 15% this year. Even Ford and GM are up by about 80% and 50% respectively thus far in 2021. The underperformance comes as investors move funds away from high-growth stocks into value and cyclical stocks in order to play the re-opening of the economy following Covid-19. However, we see a couple of catalysts over the near-to-medium term that could drive a Tesla rally in the coming months.

Tesla CEO Elon Musk has said that the company would hold an AI Day event, likely in July, where the company is expected to provide updates on its progress in artificial intelligence hardware and software. Self-driving is at the core of Tesla’s AI initiative and the company previously said that its self-driving system could achieve Level 5 autonomy by the end of 2021 – essentially meaning that Tesla cars can drive themselves with no driver input at all. Any positive developments on the self-driving front- which is seen as a big driver of Tesla’s value – could cause the stock to rally.

Tesla has largely relied on regulatory credit sales to drive earnings over the last several quarters and the narrative that Tesla’s core auto business remains in the red hasn’t exactly helped the stock. For example, in Q1, if not for the $518 million in credit sales, Tesla would have posted a quarterly loss. However, Tesla could turn this around fairly quickly given its promising unit economics. Tesla automotive gross margins excluding regulatory credits stood at a solid 22% in Q1, well ahead of the broader auto industry average of under 10%. As Tesla scales up car production further in the coming quarters, we could see the auto business drive Tesla’s bottom line.

Tesla has some really aggressive growth plans, noting that it intends to expand deliveries by over 50% each year over a multi-year horizon. The company’s upcoming production facilities in Berlin and Texas, which are likely to open in late 2021 or in early 2022, and the introduction of its new pickup, the Cybertruck, are likely to be key to its near-term growth plans. The timely completion of these facilities and a swift production ramp of new vehicles could give investors confidence that Tesla is on track to meet its lofty targets.

Want to play the growth in the EV market without betting on individual OEMs? Check out our theme on  Electric Vehicle Component Supplier Stocks  which includes stocks of companies that make EV components and raw materials for batteries.

[5/17/2021] Is The Recent Correction An Opportunity To Buy Tesla Stock?

Tesla stock (NASDAQ: TSLA) declined by almost 12% over the last week (five trading days), compared to the S&P 500 which remained roughly flat over the same period. There were a couple of trends impacting the stock including weaker than expected sales in China in April and the company’s decision to stop accepting Bitcoin as a mode of payment for the purchase of its vehicles. Moreover, the broader sell-off in technology and high-growth stocks over the last week also likely impacted Tesla. So will Tesla stock continue to decline over the coming weeks and months, or is a recovery looking more likely? According to the Trefis Machine Learning Engine, which identifies trends in a company’s stock price data for the last ten years, TSLA stock has a solid 69% chance of a rise over the next month after declining by about 12% in the last five trading days. See our analysis Tesla Stock Chances Of Rise for more details.

So is Tesla stock a buy for long-term investors? Although Tesla stock has corrected by -20% year-to-date and remains down by about 33% from its all-time highs, we think it is still pricey, trading at over 130x consensus 2021 earnings. While the company should see strong growth ahead, Tesla’s guidance of 50% annual growth in deliveries over a multi-year horizon looks aggressive, given the increasing competition from not just mainstream automakers, but also new entrants into the EV space. Moreover, there are concerns regarding the company’s business in China, which has come under scrutiny from regulators amid local reports of quality and safety issues. Tesla is counting heavily on the country to drive growth (sales in China more than doubled last year). In April, Tesla’s wholesale sales of its made-in-China vehicle declined 27% in April versus March to about 26k units, while over half the sales were related to exports, leading to questions surrounding domestic demand. Tesla’s relative lack of profitability from its core automotive business is also a concern. Although the company posted a net profit for Q1, it was driven largely by sales of regulatory credits, without which Tesla would have been in the red.

[4/15/21] Will Tesla Stock Rally Further?

Tesla stock (NASDAQ: TSLA) rallied by almost 17% over the last week, driven by a broader recovery in technology stocks and a bullish outlook from multiple brokerages. Moreover, the company also raised prices on select models including its entry-level Model 3 Standard Range Plus ($500 price increase) and its top-end Model S Plaid Plus ($10k increase), likely signaling that it is more confident about demand going forward. So will Tesla stock continue its upward trajectory over the coming weeks and months, or is a correction looking more likely? According to the Trefis Machine Learning Engine, which identifies trends in a company’s stock price data for the last ten years, TSLA stock has a 71% chance of a rise over the next month after rising by about 17% in the last five trading days. The expected one-week return for the stock is 7.6%. See our analysis Tesla Stock Chances Of Rise for more details.

Although Tesla stock still looks pricey, trading at over 160x consensus 2021 earnings, it still remains about 20% below its recent highs. We think there are a couple of tailwinds for the stock in the medium term. Firstly, the regulatory environment for electric vehicles should become more conducive. With the Covid-19 stimulus bill now signed into law, Democratic lawmakers who control the House and the Senate (albeit by a slim margin) are likely to focus on climate-related issues – a key component of President Biden’s agenda, potentially benefiting EV players. Tesla’s delivery growth is also likely to soar this year, driven by market share gains in China and plans to expand production further with new plants slated to open in Texas and Berlin this year.

[3/9/2021] Should you Buy Tesla Stock After The Recent Correction

Tesla stock (NASDAQ: TSLA) has declined by about -22% over the last five trading days and remains down by close to -34% over the past month. Although there hasn’t been much news specific to the company, growth stocks, in general, are being impacted by rising bond yields and fears of higher inflation. Stocks are valued based on discounted future cash flows, and through the ultra-low interest rate environment following Covid-19, investors likely cared less about whether profits were available today or out in the future. This benefited growth stocks such as Tesla, which rallied by about 8x in 2020. However, with Covid-19 cases on the decline and vaccines being rolled out, investors are more optimistic about the economic recovery, pushing up bond yields. The 10-year U.S. Treasury rate has jumped from about 1.1% to about 1.6% in just about a month and this is likely causing investors to re-allocate funds to more cyclical and value stocks.

So is Tesla stock poised to fall further or could it see a recovery? Per our machine learning model, which analyzes five years of stock price data, Tesla stock has a strong chance of a rise over the next month after declining by -22% over the last five days. See our analysis Tesla Stock Chances of Rise for more details. Now, what’s the outlook like for Tesla in the longer term? Although the stock still looks pricey, trading at about 135x consensus 2021 earnings, Tesla could quickly grow into this valuation if it executes well. During its most recent earnings call, Tesla said that it expects to grow deliveries at a CAGR of 50% a year over a multi-year horizon, meaning that it could possibly be selling almost 40x the number of vehicles it currently does by 2030 if it sustains such a growth rate. While a lot of things need to fall into place for Tesla to grow to these numbers, the company has shown that it is capable of quickly expanding manufacturing capacity, with its Shanghai plant going online in record time, and its factories in Texas and Berlin commencing production sometime this year. (related: Tesla Upside: How Tesla Gets To A $10 Trillion Market Cap)

[3/2/2021] Will Tesla Stock Rebound After 17% Drop?

Tesla stock (NASDAQ: TSLA) has declined by around 17% over the last month and currently trades at $675 per share. There are a couple of factors driving the sell-off.  With the Covid-19 vaccine rollout gathering steam and with U.S. Covid-19 cases on the decline, investors are likely betting on a swifter economic recovery, moving money away from technology and high-growth stocks to more cyclical and value stocks. Moreover, the tech sector saw a sharp sell-off last week following an increase in bond yields. Tesla stock has been particularly badly hit, considering that it has surged by over 8x from its March 2020 lows, and trades at a rich valuation of about 160x consensus 2021 earnings. So will Tesla stock continue its downward trajectory over the coming weeks and months, or is a rally looking more likely?

According to the Trefis Machine Learning Engine, which identifies trends in a company’s stock price data for the last ten years, returns for Tesla stock average close to 17% in the next month (21 trading days) period after experiencing a -17% decline over the last 21 trading days. The stock is also likely to outperform the S&P 500 over the next month, with an expected return that would be 13% higher compared to the S&P 500.

But how would these numbers change if you are interested in holding TSLA stock for a shorter or a longer time period? You can test the answer and many other combinations on the Trefis Machine Learning to test TSLA stock chances of a rise after a fall and vice-versa. You can test the chance of recovery over different time intervals of a quarter, month, or even just one day!

MACHINE LEARNING ENGINE – try it yourself:

IF TSLA stock moved by -5% over five trading days, THEN over the next 21 trading days, TSLA stock moves an average of 4.9%, which implies a return that is about 3% ahead of the S&P 500.

More importantly, there is a 57% probability of a positive return over the next 21 trading days and a 52% probability of a positive excess return after a -5% change over five trading days.

Some Fun Scenarios, FAQs & Making Sense of TSLA Stock Movements:

Question 1: Is the average return for Tesla stock higher after a drop?

Answer:

Consider two situations,

Case 1: Tesla stock drops by -5% or more in a week

Case 2: Tesla stock rises by 5% or more in a week

Is the average return for Tesla stock higher over the subsequent month after Case 1 or Case 2?

TSLA stock fares better after Case 2, with an average return of 4.9% over the next month (21 trading days) under Case 1 (where the stock has just suffered a 5% loss over the previous week), versus, an average return of 8.8% for Case 2.

In comparison, the S&P 500 has an average return of 3.1% over the next 21 trading days under Case 1, and an average return of just 0.5% for Case 2 as detailed in our dashboard that details the average return for the S&P 500 after a fall or rise.

Try the Trefis machine learning engine above to see for yourself how Tesla stock is likely to behave after any specific gain or loss over a period.

Question 2: Does patience pay?

Answer:

If you buy and hold Tesla stock, the expectation is over time the near-term fluctuations will cancel out, and the long-term positive trend will favor you – at least if the company is otherwise strong.

Overall, according to data and Trefis machine learning engine’s calculations, patience absolutely pays for most stocks!

For TSLA stock, the returns over the next N days after a -5% change over the last five trading days is detailed in the table below, along with the returns for the S&P500:

 

Question 3: What about the average return after a rise if you wait for a while?

Answer:

The average return after a rise is understandably lower than a fall as detailed in the previous question. Interestingly, though, if a stock has gained over the last few days, you would do better to avoid short-term bets for most stocks – although TSLA stock appears to be an exception to this general observation.

TSLA’s returns over the next N days after a 5% change over the last five trading days is detailed in the table below, along with the returns for the S&P 500:

It’s pretty powerful to test the trend for yourself for Tesla stock by changing the inputs in the charts above.

While Tesla stock may have declined, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how the stock valuation for Matson vs. Intel shows a disconnect with their relative operational growth. You can find many such discontinuous pairs here.

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