(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of TSLA.)
Tesla Inc.'s (TSLA) stock has been on a wild ride this year, reaching a 52-week high in August, then plunging 30% weeks later. Don't expect volatility in the stock to end even as the company reports results on Wednesday after the close of trading. The options market is pricing in the potential for massive volatility in the weeks after earnings: a 17% price swing up or down.
Analysts have been raising their earnings forecasts for the company and see it nearing profitability in the third quarter on the strength of the ramp-up of its new, mass market Model 3 sedan.
As mentioned, the options set to expire on November 16 are pricing in a massive amount of volatility following third-quarter results. An analysis of options market pricing using the so-called long straddle strategy suggests the stock could trade higher or lower by 17% from the $290 strike price. It places the stock in a $95 trading range between $243 and $338.
One Big Bullish Bet
At least some options traders are betting that the stock will rise following the results. Since October 18, the number of open calls at the November $310 strike price has increased by more than more than five-fold to 10,000 open contracts. The calls cost about $16 per contract, and a buyer of the calls would need the stock price to rise by 11% to $326 to break even from the current price of around $294 per share. It is a big bet as well, worth about $16 million.
Analysts estimate the company will report a loss of $0.07 per share, up from estimates in September for a loss of $0.33 per share. Additionally, revenue for the quarter is expected to more than double to $6.3 billion.
Even better, analysts have increased their earnings estimates for 2019 by 88% to $3.26 per share while increasing 2020 forecasts by 22%.
Revenue estimates have increased more modestly. Where Tesla's stock goes after quarterly results will largely depend on the company's ability to generate profits, boost cash flow, and also reduce the rate at which it's burning cash. Progress in these areas could help lift the stock.
=Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.