Tesla stock is turning around. Tesla Inc (Nasdaq: TSLA) stock gained more than 25 percent last week after the company reported a surprisingly profitable third quarter. But while Tesla investors cheered last quarter’s earnings beat,…
Tesla stock is turning around.
Tesla Inc (Nasdaq: TSLA) stock gained more than 25 percent last week after the company reported a surprisingly profitable third quarter. But while Tesla investors cheered last quarter’s earnings beat, others are already looking ahead to Tesla’s fourth quarter. Tesla will need to demonstrate it can be sustainably and consistently profitable for TSLA stock to break out to new highs. In the days since Tesla’s earnings beat, Tesla bulls on Wall Street have weighed in on why Tesla could keep the ball rolling in the fourth quarter as well. Here are seven reasons Tesla could have a huge fourth quarter.
Tesla has positive margins.
Operating margin of 6.1 percent in the third quarter came in ahead of expectations, and Morgan Stanley predicts operating margins will remain above 5 percent in the fourth quarter. Model 3 gross margin of greater than 20 percent is also a positive sign for Tesla, especially after some analysts had speculated the Model 3 may never be profitable. While Tesla said it expects average sales price declines and mix shift to lower-priced models will weigh on margins, the company has a chance to prove in the fourth quarter that it can offset those declines by increasing efficiency.
No capital is needed.
Tesla again said it does not need additional capital and plans to use its positive cash flow to pay down debt due in the first half of 2019. If the company is able to avoid a capital raise in the fourth quarter, it would be a positive sign for investors that Tesla’s balance sheet isn’t in as dire a position as some analysts have speculated. Tesla’s ballooning debt has been a red flag for some investors who perceive it as too much of a risk, but that could change if Tesla proves it doesn’t need outside capital.
Pressure grows on short sellers.
According to S3 Analytics, Tesla has the second-largest outstanding short position of any U.S. stock. There are currently about $8.7 billion worth of Tesla shares held short, and the strong performance in the third quarter puts even more pressure on those short sellers to change their minds about the long-term trajectory for TSLA stock. Buying volume from short covering can easily create a snowball effect, driving TSLA stock higher and triggering even more short covering. Even if only a relatively small portion of short sellers abandon their positions, it could be a major bullish catalyst.
Analysts are upgrading.
Tesla’s earnings beat has already triggered some prominent short sellers, such as Citron Research’s Andrew Left, to transition from bearish to bullish. Still, Tesla remains one of the least-respected stocks among Wall Street analysts. According to CNN Money, only nine of the 31 analysts covering Tesla stock have “buy” or “outperform” ratings on the stock, and 12 analysts have “underperform” or “sell” ratings. The good news for Tesla bulls is that those numbers suggest there are plenty of opportunities for upgrades in the fourth quarter from analysts who don’t want to whiff on another big Tesla quarterly earnings report.
Tesla is dominating its markets.
According to CleanTechnica and EV Obsession, the Model 3, Model S and Model X were the three best-selling U.S. electric vehicles in the third quarter, with a combined 69,540 sales. For perspective on how dominant Tesla’s performance was, the fourth best-selling EV model was the Toyota Motor Corp. (TM) Prius, which sold only 6,268 vehicles in the quarter. Outside the EV market, Tesla is also dominating the entire luxury vehicle market as well. CleanTechnica estimates that Tesla sold about 8,000 Model Ss in the U.S. last quarter, more than all other luxury vehicle models combined.
Success is no longer a hypothetical.
Tesla’s big third quarter may have helped shift the conversation about Tesla from whether or not the company can be a viable business to just how large the company’s total addressable market will be. Growth investors had plenty of reasons to be leery of Tesla up to this point. But if Tesla can prove that third-quarter profitability was no fluke, TSLA stock instantly becomes one of the most compelling long-term growth opportunities in the market. While bears may say TSLA stock is still overvalued, high valuations certainly haven’t hurt growth stocks like Amazon.com (AMZN) or Netflix (NFLX).
There are new catalysts ahead.
They may not come in the fourth quarter, but Tesla has a handful of potentially bullish catalysts ahead in the near term. The company will soon appoint a new chairman of the board, and the announcement of a fresh leadership face could boost the stock. Tesla recently announced it is building a facility in Shanghai and more news about expansions into China and Europe is likely coming. A potential end to the trade war between the U.S. and China would be welcome news as well considering Tesla said tariffs will cost the company $50 million in profits next quarter.