Tesla Stock May Break Out, Fueling a 10% Increase

(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 maybe technically breaking out, and that may send shares about 10% higher, back toward $340. Tesla's shares have struggled over the past year, with the stock down about 4.5%, versus the S&P 500, which has climbed by 12.5% over the same period. Tesla's stock has struggled due to delays in the production of its new mass-market Model 3 sedan.

Tesla reported better-than-expected first-quarter results on May 2 that beat on both the top and bottom lines. The company's revenue of $3.41 billion topped estimates by nearly 3.5%, while the company reported a loss of $3.35 per share, about 5% better than estimates. The better-than-expected results have led analysts to up their revenue estimates for the year and reduce their view of the company's expected losses. 

Technical Breakout

The chart below shows that Tesla stock is currently sitting right at a critical resistance level at around $310. Should the stock's price rise meaningfully above $310, it would likely result in shares rising all the way back to a range of $335 to $340, the next level of resistance. That resistance is part of a long-term multiple-month downtrend that has been in place since September 2017. 

The relative strength index (RSI) has been trending lower since April 2017 and hit oversold conditions at a level of 23. A reading below 30 indicates a stock is oversold, while a reading above 70 is considered overbought. The prior two times the RSI hit such oversold conditions proved to either be a bottom in the stock or resulted in shares bottoming a few weeks later, followed by a sharp rally. 

Analysts Up Estimates

Part of the optimism is likely stemming from analysts turning more bullish on the stock. Analysts have gradually increased their revenue estimates for the company by nearly 2% for the second quarter to $4.245 billion while reducing forecasts of a net loss for the company by 11.8% to $2.66 per share. Meanwhile, for the full year, analysts have increased revenue estimates by nearly 3.5% to $19.68 billion and reduced its net loss by 5% to $7.13 per share. 

TSLA Revenue Estimates for Current Quarter data by YCharts

Short Sellers

The short sellers remain undeterred, betting shares of Tesla will fall, and they have been aggressively shorting shares. The number of shares short hit a record high through the end of April at 39 million, rising by more than 23% just since the end of March. 

TSLA Short Interest data by YCharts

Should shares of Tesla break out, it could give short sellers an excellent reason to start lightening their load, helping to fuel the rise only further. 

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.