Game-Changing News For Tesla Investors

Key Points

• Tesla gets its 2nd upgrade to blue-chip quality credit. 
• The news will make raising money cheaper and easier. 
• China Q1 sales are expected to be hot. 

Tesla NASDAQ: TSLA received a credit-rating upgrade from Moody’s Investors Services, which is game-changing news for the company. The upgrade is a single notch to Baa3 from Ba1, which is enough to get the company out of speculative junk status and into investment-grade quality. This is important because this is the 2nd upgrade to investment quality since October 2022. The 2nd upgrade puts the company into what bond investors consider “blue-chip quality, " meaning risk-averse investors can start buying Tesla debt. 

What is a blue-chip stock? Blue-chip stocks are the most valuable and highly sought-after companies on the market. They have national, if not global, recognition, well-established businesses, and relatively low debt levels. They offer investors some of the safest investments but are not always risk-free. 

What Does The Credit Upgrade Mean For Tesla? 

This is a whole new market of debt investors for Tesla and has far-reaching implications. Not only will more investors be willing to buy Tesla debt, making it easier to raise capital, but it will also be cheaper. Bonds with higher credit ratings and lower risk of default have lower interest rates which is the cost of borrowing. Tesla’s borrowing costs are already on the way down due to repeated upgrades of its credit, which can be seen in the annual report. The company net-cashed used in finance activities fell by more than $1.5 billion, which can be expected to decline further. That is a significant headwind for profits diminishing. 

Tesla was already in an enviable position relative to the broad EV market. Its balance sheet is a fortress compared to companies like Toyota Motors NYSE: TM, Mercedes-Benz OTCMKTS: MBGAF and BMW OTCMKTS: BMWYY. It includes details like net cash compared to net debt, a low 12.5% leverage ratio compared to greater than 100% for most others and an untapped $5 billion revolving credit facility the company may increase to $7 billion later this year. 

Blue-Chip Quality Tesla To Have Strong Quarter In China 

Among the most recent reports about Tesla is a forecast for strong results in China. This contradicts reports that some manufacturers, like BYD OTCMKTS: BYDDF, are cutting back on production. According to data from China Merchants Bank International, the company sold 106,915 units from January 1st through March 19th, about 1371 units per day. This is up 3.3% daily compared to its best quarter, Q4 last year. In this light, the analysts' consensus outlook may be underestimating the company’s strength. The analysts expect a sequential decline in revenue, not a 3% increase, due to broad price reductions at the end of last year. 

Tesla received some mixed analysts' activity over the past 2 months, leaving this part of the story unchanged. Bulls see this stock moving up at least 17%, while the bears think it is grossly overvalued. The takeaway is that sentiment is firm at a strong Hold with a price target firming compared to last month and last quarter. The analysts may not provide a rally catalyst but support the market. 

The Technical Outlook: Tesla Forms A Bottom 

Tesla's price action hit a low early in the year, which turned out to be the bottom. The stock has rebounded since and traced out a large Head&Shoulders pattern. The pattern is on the verge of confirming complete reversal but needs to get above the $215 level. In this scenario, the market may continue higher and retest $240 and $280. If not, the stock will remain range bound at the current levels until more news is released.