A great earnings report from Elon Musk’s Tesla on Wednesday reignited the dreams of Tesla bulls. Before investors get pulled in too fast, slow down. There are other factors at play here.
Let’s explore this with the help of a chart. Please click here for an annotated chart of Tesla TSLA, +17.67% stock.
Note the following:
• The chart shows the gap up in Tesla stock after the earnings report was released.
• Tesla reported earnings that were better than the consensus and the whisper numbers. Stocks move based on the difference between the whisper numbers and the actual reported earnings and projections.
• Investors should look at the big up move in Tesla stock shown on the chart in the proper context. The proper context is the median move in Tesla stock over the past eight quarters is 7.7%.
• Tesla says it sees positive quarterly free cash flow in the future. This is a huge positive for Tesla stock.
Read: Tesla bull praises ‘Picasso-like’ quarter, but others question whether profit can be sustained
• Tesla sees positive GAAP net income in the future. This is a big positive for Tesla stock.
• Tesla says self-driving “appears to be on track” for year-end release. This is a big positive and if it actually happens, it may give Tesla stock another push up.
• A careful analysis of the earnings shows that Tesla appears to be succeeding at controlling costs. This is a big positive.
• Tesla says its Shanghai Gigafactory is ahead of schedule. This is a positive.
• In spite of all the positives, Tesla’s valuation is highly stretched. This is huge negative.
• Irrespective of how well Tesla does, strong competition is ahead. This is a huge negative.
• The biggest risk to Tesla stock is that someday Wall Street may start valuing Tesla like a car company. In contrast, right now valuation of Tesla stock is based on dreams.
• The chart shows an earlier Arora Report call that in a short squeeze, Tesla stock can quickly move to $300. This is exactly what has happened now. Interestingly this call was made when Tesla stock was in free-fall and trading around $190.
• According to algorithms at The Arora Report, about 60% of the up move in Tesla stock is the result of a short squeeze.
• Going into earnings, the segmented money flow chart that The Arora Report published showed smart-money flows were neutral in Tesla stock, momo (momentum) crowd money flows were mildly positive and short-squeeze flows were extremely positive. Segmented money flows are like an X-ray that show what is happening beneath the surface. To learn about segmented money flows, please see, “Momentum investors are now buying shares of Apple, Amazon and Netflix.”
• So far after the earnings report, there is no smart money buying. It is all about the momo crowd and a short squeeze. This is a negative.
• The chart shows that the prior downtrend in Tesla stock is decisively broken and now Tesla stock is in an uptrend. This is a positive.
• Should you buy Tesla stock right here? Unless you are a very short-term-oriented and experienced trader, keep in mind that as shown on the chart, the resistance zone is not too far away. This is a negative.
• The relative strength index (RSI) shows that the stock is overbought but there is still room to run. This is a positive.
• One of the keys to success in investing is to be brutally honest. Often, some stocks become cult stocks. A characteristic of a cult stock is that it has die-hard believers who stick with the stock no matter what. Tesla is a cult stock with many dreams of a $1,000 stock price.
Read: Here are the newest electric vehicles with the most range
Ask Arora: Nigam Arora answers your questions about investing in stocks, ETFs, bonds, gold and silver, oil and currencies. Have a question? Send it to Nigam Arora.
Dream stock
At The Arora Report, we attempt to identify change before the crowd does. The premise of our method is that most money with the lowest risk is made by getting ahead of the crowd when change is occurring. We are not afraid of publishing big targets in advance. For example, our Apple AAPL, +0.16% position is long from a price of $18.73. A long time ago, before the 7-for-1 split, The Arora Report was talking about Apple reaching $1,000. At that time most targets were $300-$400. A pre-split $1,000 equates to $142.85. Apple has far exceeded that target and is now trading at $244.40 on that basis as of this writing. Of course, we have been raising Apple targets along the way.
The current valuation of Tesla is simply too high to make any big targets with a high confidence level at this time. Of course, investors should not underestimate the high risk in Tesla stock.
For prudent investors, the best way to look at Tesla stock right now is as a trading stock.
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions at any time. Nigam Arora is an investor, engineer and nuclear physicist by background who has founded two Inc. 500 fastest-growing companies. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.