Tesla Stock Predictions

Summary

Tesla’s stock price has taken a hit since the earnings report, as guidance for deliveries was lowered.

The near-term outlook is admittedly bleak, as results during the rest of the year will underwhelm.

Long-term investors should not be discouraged, though, as future profits actually should come sooner than previously expected.

I Know First algorithm is bullish on Tesla over the long-term, though further losses this year are likely.

Tesla Motors Inc. (NASDAQ:TSLA) reported their second quarter earnings on Wednesday, and it appears that investors are going to have to be patient for longer than expected. Some projected that the stock would be climbing up closer to $300 as the company was addressing some of its issues, like its sales in China. However, the company’s losses tripled and it cut guidance for its deliveries this year.

The stock price dropped over 7% in after-hours trading as a result, with the company’s short-term outlook growing worse. With the stock price climbing almost 21.5% so far this year, the stock was poised for a pullback due to concerns over its cash flow and whether the company can live up to its future projections. Long-term investors who are in it for the long haul with Tesla should be excited to add to their positions, as the stock could fall further before things turn around.

Lowered Guidance

Management at Tesla had been guiding for deliveries of 55,000 vehicles this year, but lowered that figure to a range as low as 50,000 vehicles. The issue is the ramp up of the Model X SUV, which is finally set to be released this September after multiple delays. CEO Elon Musk has offered unrelenting praise for the company’s newest offering in the past, claiming that it would allow Tesla to double the company’s sales.

During the earnings call, his stance on the vehicle didn’t change. But instead of placing an emphasis on the incredible design and craftsmanship, the emphasis was focused on how difficult the ramp up of production will be. Musk even claimed that the vehicle is “a particularly challenging vehicle to build. Maybe the hardest car to build in the world.” He added a quick disclaimer that it was still an amazing vehicle that would blow people away.

Figure 1. Source: The New York Times

The emphasis on how difficult the vehicle was to build was the source of the lowered guidance, and Musk and the rest of the company’s management offered constant warnings that the company could have issues with production throughout the rest of the year. The ramp up is exponential, and any supply shortage will cause the company to significantly fall behind on deliveries. The second row seat was one example given that could hold production of the new vehicle back.

Because the ramp up takes the shape of an s-curve, a one-week holdup could mean 800 fewer Model X vehicles are delivered this year. With so many different parts and suppliers for the new vehicle, there is sure to be some difficulty, explaining the reduced guidance.

The lowered guidance is a blow for the stock after Musk and others continually claimed that the company would have 55,000 deliveries this year. Another blow is the company’s free cash flow might not break even until the first quarter of next year. Tesla’s resources are now being strained as it continues to invest in the machinery to produce the Model X as well as the Gigafactory currently under construction.

Tesla’s cash holdings have fallen to $1.15 billion as of the end of the quarter, $359 million less than the end of the previous quarter. This was even as the company drew down $50 million on its revolving credit line. Musk asserted that the company did not need to raise capital equity, but he did not completely rule the possibility out.

Chances are that the cash holdings will decrease further, as outgoing CFO Deepak Ahuja did not commit positive free cash flow during the fourth quarter, claiming that it was hard to predict due to the ramp up of Model X deliveries. With guidance for deliveries during the rest of the year revised downwards and further losses expected during the rest of the year, the short-term picture is not pretty, explaining the pullback on the stock price.

Takeaway

While Tesla bears might point to the earnings report as proof that they were right about the company’s valuation being way too high considering the current lack of profits, long-term investors are unlikely to lose faith. Musk, when commenting on the lowered guidance on deliveries, mentioned the company’s focus on quality vehicles was more important than pushing out enough vehicles to meet its goals.

This trend of the company’s long-term focus remaining the priority was present throughout the call. Musk did not back away from his projection of 500,000 vehicles in 2020, which is what investors should be more concerned about. The stock price was not trading at such a high level because of its current production levels or profits next year.

Even with all of the poor news, people who believe in Tesla’s future vision of energy should take the chance to invest at the lower prices. A pullback after the rapid climbs this year was expected, as I Know First wrote about here. The earnings report could actually strengthen the bullish outlook of the stock, as huge profits could be seen coming sooner rather than later thanks to the battery storage business.

Figure 2. Source: wtop

The claims of over $1 billion in reservations remain suspect, but Musk argued that most of these reservations seem to be real. He offered projections of $400 to $500 million in sales for 2016, with that number climbing to at least a few billion dollars by 2017. With Model X production going at full tilt at that point and the building of the Gigafactory completed, the high valuation will seem insanely low in retrospect.

Algorithmic forecast

I Know First supplies financial services, mainly through stock forecasts via theirpredictive algorithm. The algorithm incorporates a 15-year database, and utilizes it to predict the flow of money across 2000 markets. The self-learning algorithm uses artificial intelligence, predictive models based on artificial neural networks, and genetic algorithms to predict money movements within various markets.

The algorithm produces a forecast with a signal and a predictability indicator. The signal is the number in the middle of the box. The predictability is the number at the bottom of the box. At the top, a specific asset is identified. This format is consistent across all predictions. The middle number is indicative of strength and direction, not a price target. The bottom number, the predictability, signifies a confidence level.

I Know First published a bearish forecast on Tesla, an electric vehicle manufacturer and electric battery supplier, on July 23 2015 (2 weeks before earnings). Having explained how I Know First’s algorithm works, it is worthwhile to see if the algorithm agrees with the bullish fundamental analysis of the company. The one-month and three-month forecasts for Tesla are included.

Tesla has bearish projections for both time periods. These signals came before the stock fell over 10% due to the poor earnings report, though, meaning that at the lower levels, the stock is most likely bullish. Investors should wait before adding to their positions, as Tesla’s stock is likely to fall further in the short-term. However, the long-term outlook for the company remains as strong as ever, and investors should monitor the situation for the right opportunity to buy the stock.

A positive signal strength does not mean investors should automatically buy the stock. Dr. Roitman, who created the algorithm, created rules for entry for a stock such as Tesla. Using this trading strategy, an investor should buy a stock if the last 5 signal strength’s average is positive and if the last closing price is above the 5-day moving average price. When both of these conditions are met, it is a good time to initiate a position in the stock.

Conclusion

In the short-term, the stock price is likely to continue falling. Even after lowering guidance, the company still might be able to meet it if the production concerns with the Model X bear out, as the company will need to deliver 17,000 vehicles to reach the low end based off its projected deliveries during the current quarter.

But the long-term outlook has not changed. Tesla has come a long way in the past five years, and growth during the next five years should be even greater as the company expands with new vehicles and a whole new business line. While projecting out that far has its risks, such as increased competition, those who believe in Musk and the company’s vision should buy this stock as it falls into the $220-$230 dollar range.

It might take longer than expected for the stock to reach $300, but short-term profit is not what this company is about. Long-term investors should not be disheartened by the earnings call or the stock pullback, but should use the opportunity to increase their positions. I Know First believes the stock is likely to fall further in the short-term, but the long-term outlook remains overwhelmingly positive.