In a dramatic fashion, on August 5, 2024, Tesla (NASDAQ:TSLA) market shares dropped 12.4%. This was in direct response to the Bank of Japan hiking interest rates. The interest rate hikes wiped out trillions of dollars worth of market capitalization across big tech. However, Tesla stock’s share price has since recovered, gaining 8.04% over the past five days.
I have taken a definitively bullish stance on companies like TSLA due to the falling volatility in the market. The sharp sell-off was characteristically fueled by panic. And many market bargains are ready to be scooped up by investors during this volatile time period.
I give Tesla stock a buy rating due to its projected earnings and revenue increases that are on the horizon. Also, I’ll delineate a sell case for Tesla stock. This will provide a balanced view of the firm’s opportunities and risks in the market.
Tesla’s Cyclical Wobbles and New Models
Despite Tesla’s “difficult environment,” the company actually managed to exceed my expectations for its recent quarterly results in some cases. Therefore, I take a contrarian stance with Tesla stock. Many factors were cyclically affecting other electric vehicle (EV stocks) too. This includes a lack of semiconductor chips from firms such as Nvidia (NASDAQ:NVDA). The firm still managed to beat analyst expectations and achieve record quarterly revenues of $25.5 billion, up 2% year-over-year (YOY). However, it’s also true that its earnings fell 43% to 52 cents per share. Therefore, it missed analyst expectations by a wide margin.
Where my contrarian case takes hold is in Tesla’s plans for new vehicles. That includes more affordable models such as its $25,000 entry-level Redwood model. It remains on track for production in the first half of 2025. Over time, Tesla’s market share has come under attack by far cheaper Chinese-made EVs. Autos produced by Byd Company (OTCMKTS:BYDDF) currently dominate the Asian market. Yet, consider the 10,000 vehicle production target for TSLA’s Redwood model. Additionally, the company expects profitability for its Cybertruck near the end of the year. These factors shape Tesla into a position of strong recovery. Also, it provides more equal footing with its budget competitor.
Bullish Technical Momentum
While Tesla stock might have disappointed the market with its earnings, I see several indicators pointing to bullish momentum in the short term. And this is evidenced by strong signs in the options market for Tesla’s put and call contracts. Particularly important is the open interest for the August 16 expiration, which is this Friday. The put/call open interest ratio is 0.61, showing significantly more open interest in calls compared to puts. The implied volatility of 6.45% may suggest that investors will be in for a much smoother ride this week compared to previous ones, largely in part of the VIX falling 62.23% over the past five days.
Another bullish signal is that after Tesla stock dipped into oversold territory on August 7, momentum has steadily risen over the past trading session. Also, investors can find underlying strength in terms of volume. This could potentially signal a bullish reversal in the near future. However, relatively little interest is being shown TSLA by bulls or bears. So, I see a gradual upward climb for Tesla stock as opposed to violent swings in its valuation.
Reasons to Sell
Despite my bullishness of Tesla’s prospects, a compelling sell case can be made from Tesla bears. Investorplace author Faizan Farooque recently wrote that the company’s aggressive price cuts have led to shrinking profit margins. And gross margins dropped from 23.8% to 17.6%, and operating margin fell from 16% to 8.2%.
Additionally, I believe that due to the persistent undercutting by Chinese EV makers and Tesla’s efforts to keep up, it is undergoing a bit of an identity crisis. For some, Tesla stock is synonymous with American-made quality (and luxurious) EV vehicles.
To me, an appeal to Tesla is its luxury and high technology, but as the features of EVs become more commoditized over time, there could be less differentiating features across EVs as a whole to make a specific Tesla model stand out and justify the higher price tag. So, Tesla must create its own edge in the market and not become another me-too brand. Otherwise, it becomes a race to the bottom, and that’s not a competition that Tesla will ever win against its Chinese competitors.
However, I maintain my buy rating for Tesla stock as it adapts to the nascent EV market. It might no longer be considered a high-end vehicle in the future. Yet, its R&D efforts can put it on the bleeding edge of the most modern vehicles. This is especially true for its cars that rest in the higher tiers such as the Cybertruck. These polarizing and unique designs may be a hint of what we can expect from the company in the future.
On the date of publication, Matthew Farley did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
