What To Make Of Tesla Right Now

Right now, everything is red, including even the old gravity-defying electric vehicle (EV) stalwart Tesla (NASDAQ: TSLA). But despite the stock’s individual performance and the continuing presence of volatility across all equity markets, is there a case for the long side? There just might be. At the very least you’ll need an iron stomach, but if you can match that with a long enough time horizon, you might be looking at the buy of the year here. Let’s take a look at some of the reasons why. 

Well for starters, despite a 7% drop during yesterday’s session alone, Tesla stock was upgraded by the team over at RBC Capital Markets. They moved their rating up to an Outperform from Market Perform after taking a positive view of the electric vehicle maker's long-term positioning. Analyst Joseph Spak and the team at RBC think that as electric vehicles enter their 3rd phase in the mid-to-late part of this decade, being able to deliver EVs will increasingly depend on their supply chain, an area where they see Tesla having a long-lasting advantage.

Recent Upgrades

In a note to clients, Spak wrote that "while Tesla is fairly secretive about the deals they have cut for the supply of raw materials, in talking to contacts we believe they have done more than other OEMs. The company’s early focus on vertical integration (not just batteries/raw materials but also motors, semis, software) is likely to pay off." In the short term, RBC is looking for Tesla to deliver about 250,000 vehicles in Q2 while topping margin expectations at the same time. They’re bullish enough on Tesla’s prospects, even in current market conditions to tack on a fresh price target of $1,100. Considering shares closed just under $650 last night, that’s an impressive 70% upside to be targeting. 

For technical traders, Tesla shares are at an interesting spot too. After managing a fast and furious 25% rally into the start of June, they’ve since turned back down towards their 52-week lows around the $630 level. This was where the bears ran out of steam last month and where the bulls stepped in. With inflation readings coming in hot and heavy right now, it will be interesting to see if that level can be defended as effectively a second time around. 

The move by RBC echoes that of the team at UBS, who last week upped their rating on Tesla stock to a Buy from Hold. Analyst Patrick Hummel and his team there believe the operational outlook for Tesla is stronger than ever and see an attractive entry point opening up for growth investors. In a note to clients, he wrote that "we expect Tesla’s vertical integration in semiconductors, software, and battery to result in superior absolute growth and profitability in the years ahead." Interestingly, Hummel and the team think the market still underestimates how much better Tesla will fare than electric vehicle peers in terms of growth and profitability.

Getting Involved

These are some really interesting comments to be thrown around at a time when Tesla stock is down almost 50% from last year’s all-time high. Are the sell-side heavyweights basically saying that EVs are going nowhere but up, and of all the companies with a finger in the pie right now, Tesla is head and shoulders above the rest? It certainly seems that way. In essence, the talk track is to ignore the current volatility, if not downright take advantage of it. 

To be sure though, headwinds do exist. Vehicle sales in China, a key EV market slowed in April and then fell further in May. This ties in with some investors' concerns that the electric vehicle maker will hit more potholes as it tries to bring its Shanghai Gigafactory back up to a pre-lockdown level of production. But considering how comfortable China’s authorities are with locking down entire cities overnight as they pursue a zero-COVID strategy, it’s tough to see that happening before 2023. 

But again, that’s a short-term outlook and with all EVs, none more so than Tesla, your outlook has to be long-term. If it is, then it’s fair to say there’s a strong case for the long side with Tesla at the moment.