Tesla's Stock Faces Massive Levels of Volatility

(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of TSLA.)

Tesla Inc. (TSLA) shares are nearly 27% off their 52-week high, as the company continues to struggle with the rollout of its newest electric sedan, the Model 3. Plagued by bottlenecks and production delays, the company has to this point been unable to achieve the production goals it had laid out on numerous occasions. Now, the company is scheduled to reported first-quarter results on May 2, after the close of trading, and one thing seems clear: The market is expecting a massive level of volatility.

Analysts are forecasting Tesla to report that first-quarter revenue climbed by 22.4% to $3.301 billion while forecasting a loss of $3.46 per share. But more important will be the focus on cash on hand and the burn rate of that cash during the quarter, as it could be a key indicator for Tesla's need to raise more money later this year. The company had cash and cash equivalents of $3.368 billion at the end of the fourth quarter. 

TSLA data by YCharts

Big Volatility Expected

The long straddle options strategy set to expire May 18 are pricing in a rise or fall of nearly 11.8% from the $280 strike price, following the results. The cost to buy one put and one call are about $33, and that places the stock in a trading range of $247 and $313 by expiration. The number of puts heavily outweigh the calls, by a ratio of nearly 4 to 1, with approximately 4,900 open put contracts open, with only 1,300 open call contracts. Implied volatility is exceptionally high as well, at almost 59%, nearly four times more than the S&P 500 implied volatility of 14.7%. 

Trimming Price Targets

TSLA Price Target data by YCharts

Analysts have been steadily trimming their price target for Tesla as well, with an average price target on the stock currently at $300.50, according to Ycharts, which is down about 4% from its high of $312 back in the middle of March. Analysts are split evenly on Tesla's rating, with nearly 31% rating shares a buy or outperform, while 38% rate it a hold, and 31% rating it an underperform or sell.

Slashing Estimates

TSLA Revenue Estimates for Current Quarter data by YCharts

Analysts have slashed revenue estimates for the quarter by roughly 8% since the start of the year as well, looking for revenue of only $3.3 billion down from $3.59 billion at the beginning of the year. That has led to analysts cutting earnings estimates drastically as well, forecasting a loss of $3.47 down from a loss of $2.45 at the start of the year. 

It seems evident that investors and analysts have been turning sour on Tesla since the start of the year. But that change in sentiment is likely the reason why options are pricing a big move post-results. 

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.