(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of TSLA.)
Shares of Tesla Inc. (TSLA) have advanced 40% since October 8 as the broader S&P 500 has fallen 6%. Now, technical analysis suggests that the stock may rise 11% back to its previous highs from its current price of $352 in mid-afternoon trading.
The stock's significant advance is a result of Tesla's ability to ramp up production of its mass market Model 3 electric sedan. That helped the company to deliver a third quarter profit well ahead of analysts' estimates and prompted analysts to boost revenue and earnings estimates for the fourth quarter.
Chart Nearing A Breakout
The chart shows that the stock is nearing technical resistance at $359.50. Should the stock rise above that price, the next zone of resistance will come at its previous all-time high, which is around $389.
The relative strength index has been trending higher since April when the stock hit oversold levels below 30. It suggests that bullish momentum is coming into the stock.
Short interest in the stock reached an all-time high this past spring, but is now declining dramatically. Since the end of May, short interest has fallen 24%. This could also be another driving force behind the stock's recent rise.
The future looks bright compared to a few months ago, when many critics predicted Tesla might collapse financially due to high debt and rapid cash burn. Now, analysts have raised their fourth quarter earnings estimates by four-fold since the middle of October to $2.25 per share. Additionally, revenue is expected to more than double to $7.1 billion.
Earnings estimates for next year and 2020 have risen. In fact, estimates for 2020 have increased so dramatically that the stock now trades at a 2020 PE ratio of 29. That rich multiple may sharply raise the bar for Tesla investors. Should the company disappoint as it's done so many times in the past, then the stock could fall back sharply.
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.