Published On: Thu, Feb 16th, 2017

Can Elon Musk live up to investors' wildest dreams? – #SaxoStrats

InstaForex

Background
Tesla pulled off an exceptional exercise in accounting gymnastics and hard work at their production facilities to show Q3 profits and while Q4 deliveries missed estimates the stock has been on a tear up 54% since early December. With recent quarterly earnings/delivery noise out of the way the focus is back to Model 3 production/launch, SolarCity integration and Gigafactory progress.

Tesla weekly share price since 2012

Source: Saxo Bank 

While Tesla has achieved what no one believed was possible, Elon Musk’s impressive salesmanship has helped captivating the investment community allowing Tesla shares to deviate significantly from the car industry fundamentals.

The scatter plot below shows the relationship between expected revenue 12-month forward and current market value (both on log scale). As can be seen from the data Tesla is not even close to be within the fit of the rest of the car industry. It’s a reflection of the steep expectations built into Tesla share price. 

One thing is expected revenue. The scatter plot below shows the relationship between expected EBITDA 12-month forward and the current enterprise value (EV). Here there is a decent linear fit between EBITDA and EV. Based on the chart you might even say Volkswagen is out of sync with the rest of the industry. Nevertheless on all accounts, Tesla’s shares have detached themselves from the car industry. But is that logical at this point in time? The car segment will still be the biggest segment for Tesla for the foreseeable future and thus valuation should not begin to drift too far away.

The company is post the SolarCity acquisition no longer only a carmaker. While the vertical integration seems smart it comes with great risks as SolarCity’s business model is burning cash faster than water vaporises in a desert. On the contrary, changing the narrative from a car company to that of the world’s leading energy innovation company (according to its website), is smart because it attracts a different set of investors that are willing to accept a higher valuation and additional capital raises in the future to fuel growth and capital expenditures.

We see great execution risk and the downside seems bigger than the upside at this point in time. Valuation is reflecting flawless execution and higher profitability than we believe Tesla can achieved over the next three years. Tesla 3 unit costs are already above previous estimates so the expected gross margin will start from a lower point. From a technical point of view the stock looks interesting from a shorting perspective as they are back to the levels observed twice back in 2014 and 2015.

Management and risk description
Tesla reports full Q4 earnings on 22 February and Q1 on 10 May which will be the two primary scheduled event risks over the next couple of months. The best way in our view to express a negative view on Tesla shares is through put options as the days to cover ratio is 7.4 (meaning it will take short sellers a little more than 7 days to cover their positions based on the average trading volume). A high days to cover ratio means that any positive news above market expectations could set the stage for a melt-up as short sellers scramble to get out. 

By buying put options we protect our position against that scenario. It also automatically gives us a pre-defined stop that cannot be exceeded protecting us against price jumps to the upside should Tesla deliver above expectations. Obviously this insurance come at a steep price, but still meaningful in our view given the downside risks.

Parameters

Entry: Buy puts with strike at $ 280 and expiry on 2017-06-16. The price based on yesterday’s close is $ 25.55 or around 9.1% of the underlying.

Stop: Since we are buying puts we have an in-built stop of $ 25.55 per contract or a maximum loss of 9.1% before transaction costs.

Target: Our price target is $ 220 as this reflect the average price level before the rally started in December. In our view there is nothing out of Tesla that justifies a 54% rally in such a short period. 

Time horizon: The put options expire on 2017-06-16, so the trade will run for four months translating into a medium term time horizon.

— Edited by Clemens Bomsdorf

Non-independent investment research disclaimer applies. Read more
A compiled overview of Trade Views provided on TradingFloor.com is found here

Feed for all trade views

Leave a comment

XHTML: You can use these html tags: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>