Tesla (TSLA) Priced for Perfection Ahead of Earnings

Tesla, Inc. (TSLA) reports earnings after Wednesday's closing bell, with analysts looking for a loss of $0.28 per share on second quarter 2020 revenue of $5.31 billion. The electric vehicle (EV) manufacturer lost ground despite reporting an unexpected first quarter profit in April but recovered quickly, entering a historic momentum wave that posted an all-time high at $1,795 on July 13. Tesla stock is now consolidating those impressive gains, trading about 150 points below the lofty peak.

Key Takeaways

  • Tesla stock is trading close to an all-time high ahead of Wednesday's earning release.
  • Speculators are looking for the EV manufacturer to report record second quarter deliveries.
  • An earnings shortfall could trigger a major decline because the stock is priced for perfection.

Earnings expectations are extremely high, with recent rumors insisting that Elon Musk and company will report record second quarter deliveries, the primary metric it uses to gauge growth due to high debt levels and a long string of losing quarters, which were finally broken by the first quarter's upside surprise. This makes valuation extremely difficult, requiring forensic analysts to pour through Tesla's SEC filings to gauge its actual growth curve.

Analysts are also struggling to gauge Tesla's intrinsic value because auto manufacturing has a long-standing reputation as a highly cyclical industry, with consumer sales increasing during periods of economic expansion and shrinking during recessions and downturns. Traditional manufacturers have been sounding the alarm in this regard, reporting slumping sales that have forced them to idle factories and lay off workers.

Tesla stock is priced for perfection headinge into this week's confessional, raising the odds for a sell-the-news reaction if high expectations aren't fulfilled. However, the market's most popular names have been engaged in a momentum wave since the March selling climax, while thousands of new traders have used government stimulus checks to open commission-free accounts. It isn't wise to underestimate this liquidity pocket, which is perfectly capable of lifting Tesla stock above $2,000.

What Is Valuation? Valuation is the analytical process of determining the current (or projected) worth of an asset or a company. There are many techniques used for doing a valuation. An analyst placing a value on a company looks at the business's management, the composition of its capital structure, the prospect of future earnings, and the market value of its assets, among other metrics.

Tesla Weekly Chart (2017 – 2020)

Weekly chart showing the share price performance of Tesla, Inc. (TSLA)

A multi-year uptrend topped out just below $400 in the second quarter of 2017 and eased into a trading range, with support below $250. The stock broke range support in May 2019 and entered a steep decline that ended at a two-year low in June. That downdraft completed a selling climax, giving way to a powerful advance that remounted broken support in the fourth quarter. Steady upside reached range resistance in December, generating an immediate breakout that attracted significant momentum buying interest.

Heavy short covering drove the first wave of the uptick, which added nearly 600 points in seven weeks before stalling just below $1,000 in February 2020. A failed breakout attempt completed a small double top at the month's end, with an immediate breakdown relinquishing 100% of rally gains before reversing at $350 in mid-March. The subsequent buying impulse completed an Elliott five-wave advance into $870 on May 1 and eased into a triangular consolidation that yielded an early June breakout.

The historic uptrend culminated with a six-day rally wave that added nearly 1,000 points into the July 14 all-time high at $1,795. The stock reversed in that session and settled around the $1,500 level for a week before turning sharply higher on Monday, adding 142 points. It is trading marginally lower on Tuesday morning, but speculators could return at any time, driving the stock into the prior high ahead of the earnings release.

What Is Elliott Wave Theory? The Elliott Wave Theory was developed by Ralph Nelson Elliott to describe price movements in financial markets, in which he observed and identified recurring, fractal wave patterns. Waves can be identified in stock price movements and in consumer behavior. Investors trying to profit from a market trend could be described as "riding a wave."

The Bottom Line

Tesla stock is back in rally mode ahead of Wednesday's post-market earnings report, with speculation that the EV manufacturer will report record second quarter deliveries. It's currently priced for perfection, so a shortfall or other less-than-spectacular news could trigger a high-percentage decline that cuts through the $1,500 level.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.

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