Can Tesla Inc. (TSLA) really run to $500 per share?
That's a pretty bold claim for any stock that's trading for $335 at the moment, let alone one that has the spotty track record that Tesla currently sports.
And yet, the move doesn't seem that unrealistic, even after Tesla stock took a dip on Monday despite the automaker delivering on its goal to produce 5,000 Model 3 units per week by the end of June.
The stock closed down $7.80 to $335.14 Monday.
CEO Elon Musk can now boast his company's accomplishment to an endless list of trolls, critics and short-sellers -- even if his company's stock isn't reacting the way he or the bulls would want.
The truth is, the feat makes Tesla's potential to hit $500 that much more realistic. However, Monday's decline may not have many investors believing it's possible. As with all stocks, price is truth and right now, Monday's reaction doesn't bode well for the $500 case.
In any regard, the automaker's accomplishment shows that production isn't the only thing improving at Tesla: So is its credibility.
Now granted, this is only one event and Musk has had a tendency to over-promise and under-deliver. It's something he's acknowledged and is working on improving.
That said, after Tesla came up 20% short of its first-quarter production goals, topping its goals for Q2 are impressive. In its latest statement, the company says it still expects to be GAAP profitable and cash flow positive in the third and fourth quarters. Further, it told us that there are still 420,000 Model 3 reservations in the queue.
Model 3 production was the first of three steps that Tesla needs to take for $500 to be possible. The next two are somewhat connected. Should Tesla get to the point where it's cash flow positive and profitable (Step 2), it won't need to raise capital this year (Step 3) -- an action that many analysts believe to be necessary for Tesla's liquidity.
By showing that it's becoming more efficient, Tesla is effectively buying credibility. So far, though, it's not being rewarded as such.
One argument for how improving financials could hurt Tesla? Valuation.
If Tesla becomes sustainably profitable, though, will it begin to be valued like other sustainably profitable automakers? Given the extremely low, dirt-cheap valuations that come with names like Daimler (DDAIF) , Ford Motor Co. (F) and General Motors Co. (GM) , that makes an incredibly bearish case for Tesla stock.
But not all automakers come at a discount to the market, as evidenced by Ferrari (RACE) , which trades at 34 times this year's earnings. If Tesla stock were to trade at the same valuation, it would need to earn $10 per share this. Worth noting is that analysts expect it to lose more than $6 per share this year and earn just $2.50 per share in 2019. Also worth noting is that Tesla has better growth than most automakers.
Whether Tesla is valued like the rest of its industry isn't the point. The point is, if investors start to value the stock based on its earnings, then it could be bad news for shareholders.
The Bottom Line on Tesla
So what's the bottom line here?
Tesla stock needs to hold up to the current selling pressure. If it can do so, it needs to rally and if it gets above $360, it could trigger a short-squeeze.
If it can continue to increase Model 3 production -- which again, there's increased confidence that it can now that Tesla's credibility is improving -- it should aid in its effort to become profitable and cash flow positive in the second half of 2018. In theory, bulls should cheer the move and if they do so, Tesla stock could very well be on its way higher. But several things need to happen for a run toward the upper-$400s to be in the realm of possibility, both technically and fundamentally speaking.
First, support needs to hold though. Here's the trade layout.