What if we just don't know, because the story itself does not yet have an ending? By now, you already know where I am going. The name is Tesla ( TSLA - Get Report) . The leader is Elon Musk. You all know that I have traded the name before, usually from the short side. You all know that I have opined on this name before, usually in a negative light. The story is intellectually interesting to say the least. It is an illustration of the complexity theory at work. Let's dig in.
No one forgets Musk's bazaar tweet-storm back in August. His tweets about taking the stock private at a higher valuation took the shares sharply higher. Doubts over whether or not funding has actually been secured led to SEC intervention, and that in turn took the shares much lower. Then there were a whole lot of other highly sensational news events that painted Musk in a less than flattering light. Bottom line here: Musk and Tesla were both fined $20 million each, while Musk was given 45 days to vacate the role of chairman, and then appoint two independent board members.
Back in November, Tesla exec Robyn Denholm succeeded Elon Musk in the role of chair at the firm. This morning (Friday), news breaks that Oracle Chair Larry Ellison and Walgreen Boots Alliance Global Head of Human Resources Kathleen Wilson-Thompson have been proposed to the Tesla board. This is in compliance with the demands made of Musk back in September, and from my perspective... a distinct positive.
Now, we as investors must decide on a few subjects that will impact this firm moving forward. Was the unexpected Q3 profit the start of something big, or simply an aberration experienced on the road to increased competition, and lesser customer incentive? The real impressive numbers taken from that quarter were in production. The firm delivered an aggregate of nearly 70,000 vehicles, as it transformed itself, sometimes painfully, into a mass producer.
The future remains fraught with peril. The firm faces a world sans the full Federal tax credit for new electric vehicles for buyers of the vehicles. Does this seriously dent demand? Goldman Sachs analyst David Tamberrino who has a sell rating on the name, as well as a $225 price target on Tesla's stock, surely thinks that demand will wane as the tax credit phases out over time. (Tesla stock was 3.3% in late morning trading, trading at more than $326) In the meantime, as Tamberrino points out, while production has been strong for the Model 3, he expects the sustainable demand to be appear toward the lower end of the price curve.
On the other side of the coin, Wedbush analyst Daniel Ives (four stars) sees the case for improved profitability, as well as cash flows, now that the firm has "turned the corner" on Model 3 production. Ives acknowledges concerns over European shipments, but sees China as a growth story for the firm despite recent cuts in that region. Wedbush has a 12 month target price of $440.
I'm playing (100 shares of) Tesla (without laying out $32,000-plus, or borrowing money.) The firm has two hurdles immediately in front of it. Vehicle production numbers are expected in coming days, and then Q4 earnings results are due a month later. Expectations are for EPS profit of $2.12 a share on revenue of $7.11 billion. Both of these results, if realized, will present as simply dramatic year-over-year improvement. If one thinks Tesla goes higher over the next year, this is one risk averse way of going about it.
-Purchase one TSLA Januay 2020 $325 call (implied value: 71.57)
-Sell (write) one TSLA January 2020 $400 call (implied value: 42.28) in order to partially subsidize the call purchased.
Net Debit: 29.29 ($2,929)
Max Loss: Stock goes lower, the trader is out the $2,929.
Max Profit: Stock rises above 400 in a year's time. 400-325=75. 75-29.29=45.71, or $4,571.
Bottom line: This trader is risking nearly $3,000 to try to earn a profit of up to just a bit more than $4,500.