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July 13, 2020

Time to Buy TSLA? Or Time for 'Short Shorts'?

Frank Cabibi

If you followed TSLA stock prices since April, then you've probably watched prices hike over 400% after the COVID Crash of 2020. In this article, I'm going to go over the differences between Tesla pre-crash and now, and I'll share some ideas that I think could be helpful.

News

Recently, there have been talks of the EV mega giant entering the S&P 500 listings instead of staying on the Nasdaq. This is important because Musk's company is now one of the 10 biggest companies in the US by stock market value, and they will be looked at, in my opinion, as an incumbent if listed on the Standard and Poors. Like Amazon, Tesla has demonstrated it's ability to disrupt current incumbents like Ford, GM and others, but now it's in the middle of a new phase: expansion.

Tesla has already established itself has one of the greats with a market cap of over $300 billion, which happens to be greater than the entire US and European auto sector combined. Now this can be looked at two different ways, and I'm going to get into them now.

What Bulls Think

If you're a sensible bull, you would probably think that this run has exceeded expectations and most likely won't last forever. But, that doesn't mean that the stock isn't worth a buy.

https://finance.yahoo.com/quote/TSLA/cash-flow?p=TSLA

Here, we're looking at Tesla's cash flow statement q/q. What I want to look at is the highlighted number for their Financing Cash Flow statement. Their financing cash left over on March's quarterly report is the highest it's been in the last three quarters. This tells that Tesla's got over $2.7 billion left over from financing activities, according to March's report. Financing activities include paying off debt, issuing dividends to shareholders or purchasing shares of their own company. There have been no announcements about this yet, but Tesla could start considering a paying dividend to increase investor interest. I don't think it's likely because Musk is more concerned about raising money and expanding business by creating more cars and working on new EV plants. But to have that much money in financing left over in March is a good sign for Tesla.

Tesla also announced price cuts on the Model Y by $3,000 to increase demand as analysts give the stock a price target boost. Elon Musk is now worth more than Warren Buffet on the highly speculative growth company. Optimism on the new battery has led investors to believe in more price cuts on Tesla vehicles to come.

What Bears Think

The first thing a Tesla bear thinks probably goes like, "Where has all my money gone?" The second thing they think is, "How high is the price going to go before a generous correction?" In my opinion, Tesla's stock price is way too high relative to the company's profit. Their PE ratio is actually disgustingly large at price 374X earnings.

https://www.zacks.com/stock/chart/TSLA/fundamental/pe-ratio-ttm#:~:text=Tesla%20has%20a%20trailing%2Dtwelve,value%20relative%20to%20its%20earnings.

For the world's largest auto company, their sales don't live up to their reputation. With less than 1% of all sales in the industry, Tesla is worth more than any other company I stated above. I know the market is always forward looking, but I think it's time to be reasonable. I understood the stock's run from $300s to $800-900, but now we're looking at something that's extremely overvalued.

https://finance.yahoo.com/quote/TSLA/financials?p=TSLA

Take a look at their net income; I'm seeing a lot of negatives. However, when analyzing a company, sometimes it's more important to look at their operating income/loss. Q1's operating income was finally generating money, showing that Tesla can make money off selling their products. Net income is only negative because expenses exceed revenues, which is common for companies in growth stages. But the fact that Tesla had it's first profitable quarter ever doesn't mean the stock price should be where it's at now. There have been lots of changes since March, but no news should be taking Tesla's prices this high.

Conclusion

I honestly couldn't tell you what to do with Tesla shares. I used to be a bear on this company with my main thesis that they need to make money first and establish themselves as a company that can actually operate. I think they have the potential as a company, but the stock seems to have even more potential. The Tesla brand clearly became a go-to for investors, and those who have bought and held at any point have been nothing but successful. Those who want in, but are anticipating a correction are basically stuck in purgatory. Those who are bears are now down $20 billion total. Overall, I'd say that Tesla is a great buy, but I'd like to wait for a cheaper price where price reflects earnings. I know that may never happen with this company, but it's a way of trading I've been doing for years now. I hopped on the bandwagon and rode the price from $883 per share and closed out at $1,400, breaking my rule of investment. Nick has been in the stock since April which has been the most impressive buy I've ever seen. So, I'd recommend doing your own research on the company and don't buy unless you are comfortable with the risks involved.

Featured Photo: https://media.foxbusiness.com/BrightCove/854081161001/202007/1043/854081161001_6169604254001_6169605117001-vs.jpg


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Disclaimer:

Please note that this email is my personal opinion only. I am not a licensed financial advisor, and any information shared or discussed is not to be construed as investment advice. Trading and investing involves a degree of risk, and is not suitable to all investors. Please consult with your financial advisor before making any sort of investment decisions.

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