Tesla Stock a Buy? Strong Momentum in an Uncertain Auto Industry

When you take a look at the current state of the automotive industry, it’s hard to find a lot of positives. Companies like GM (NYSE:GM) and Ford (NYSE:F) are bleeding cash with their factories closed and new vehicle sales figures heading downwards fast. However, one car company is defying expectations and making waves in the market even with all of the uncertainty surrounding the industry.

Tesla (NASDAQ:TSLA) reported a surprise Q1 profit when they announced their earnings on April 29^th and could be poised for a move back to all-time highs in the coming weeks. Although outspoken Chief Executive Elon Musk continues to make headlines for his eccentric behavior, that hasn’t scared away a lot of investors from adding shares in 2020.

The electric car manufacturer seems to be heading in the right direction in terms of their top-line growth and vehicle production capacities. Combine that with the fact that they have a unique competitive advantage in the auto industry and are working towards capturing market share in China and you have the potential for a lot of growth in the years ahead. Let’s take a look at a few reasons why Tesla shares might continue heading up even with high levels of uncertainty in the auto industry and decide whether or not now is the time to buy.

Strong Q1 Earnings Amidst Uncertainty

When Tesla announced its Q1 earnings yesterday, it caught quite a few investors off guard when it reported a first-quarter EPS profit of $1.24 a share, which increased substantially from last year’s Q1 adjusted loss of $2.90 a share. Tesla management stated in a letter to investors that “despite global operational challenges, we were able to achieve our best first quarter for both production and deliveries,” This is growth that long-term shareholders will certainly be pleased with. It also means that Tesla has now been consistently profitable for three consecutive quarters, something that they have never been able to achieve before.

Q1 has historically been slow for Tesla, which makes the Q1 revenue figure of $5.99 billion all the more impressive. However, Q2 could be a rough patch for Tesla, particularly since they have had to suspend manufacturing in the United States due to the coronavirus lockdown. The company has also pulled near-term profit guidance, so there are still big question marks about the company’s earnings numbers for the remainder of the year.

New Models

Another compelling reason to be interested in Tesla stock at the moment is that they are actively working to provide the market with more models to choose from. Model Y production appears to be going well, with the 2020 delivery forecast topping 500,000. It’s also worth noting that Tesla achieved a positive gross margin for the Model Y in its first production quarter, which is an encouraging sign for a new vehicle model.

With other new models like the Roadster, Semi, and Cybertruck in development, it will be fascinating to see how demand stacks up when these new vehicles become available for purchase. Although the newer models will likely not go into production until 2021 or later, it’s still a good sign that Tesla is exploring new market segments and new ideas. When a company as innovative and intriguing as Tesla shows the market that they are actively focused on creating new products, investors tend to take notice.

Risks in the Near Term

When a stock is up over $300 per share over the past month, you can’t help being intrigued. Tesla has been a bright spot in an auto industry that is in a lot of trouble at the moment. The company has a good chance of continuing its impressive growth after the next few quarters have subsided and it is able to ramp production up, but new investors need to be aware of some real risks in the short term.

There is a lot of economic uncertainty to deal with at the moment, along with Elon Musk’s headline-grabbing behavior. If you are a believer in the adage that “no news is bad news” than you might be willing to overlook his outbursts. However, Tesla bears will also cite the fact that oil prices are at historically low levels, which might be an impediment for consumers that previously considered making the switch to an electric car. Regardless of where oil prices go, it’s safe to say that the demand for new vehicle purchases will take a hit this quarter and potentially in Q3 as well as a result of the global health crisis.

Keep an eye on Tesla’s stock price and factory reopening over the next quarter, but be cautious about starting new positions at these price levels, especially after the massive run-up we’ve seen occur this year.