Tesla Stock: Buy the Dips, Sell the Rips

Key Points

• Tesla had a good quarter, but the positives were offset by negatives, which will likely cap gains in 2024.
• The company's growth rate is below the industry pace, and the weakness in its core business is driven by increased competition and a loss of share. 
• Plans for the cybercab won't bear fruit until 2026 at the earliest. 

Tesla NASDAQ: TSLA is a good company, but that doesn’t mean its stock price will have a significant rally anytime soon. The market for Tesla is valued in many different ways for many reasons, including its status as a vehicle OEM, an EV pure-play, a tech innovator, its energy business, AI, and the Elon Musk factor, to name just a few. The takeaway is that this market has support but also resistance to higher prices that will likely keep it range-bound for the foreseeable future. In this regard, investors and traders may want to target the range low for entry points and be prepared to sell when the price reverts to the top of the range. 

Tesla Pops After Q3 Results Are Released, but the Upside is Limited

Tesla had a good quarter, but each positive is offset by a negative, likely limiting its upside potential in 2024. Revenue is up compared to last year, growing 7.8% to $25.18 billion, but it fell short of the consensus as weakness in the core business offsets strengths in others. The growth in Q3 is good and sustains solid cash flow but is slower than the 11%  industry pace in 2023 due to increased competition, lower pricing, and loss of market share. Those headwinds are only expected to strengthen over time. 

Segmentally, auto sales grew only 2%, accounting for 84% of the revenue. Strength was seen in the energy and services segments, up 50% and 30%, respectively, but this was insufficient to offset the weakness in the core business. 

The margin news is good, and that is why the market popped after the release. The company widened the margin at all levels, driving leveraged growth in earnings, cash flow, and free cash flow. The gross margin expanded by 200 basis points, compounded by reduced cost per vehicle, lower operating expenses, leverage in the higher-margin segments, and tax-credit sales. The net result is a 10.8% operating margin, up nearly 400 basis points YOY, adjusted diluted earnings growth of 9%, and a 220% gain in free cash flow. The problem is sustainability, which is questionable given the outlook for lower-price models to sustain production and delivery growth. 

Tesla’s Future is a Long Way Off

Among the details grabbing the market’s attention is news about the future, which sustains hope for accelerated revenue growth and profitability, including details about the lower-cost models and cybercab. The company reiterated an expectation for the lower-price model to come out in the first half of 2025 and for the cybercab to ramp in 2026. 

However, few specific details were given about the lower-priced Model 2, and the safety of FSD technology isn’t up to par, which is expected to exceed human safety capability by mid-year 2025. The critical takeaway is that a $25,000 model is unlikely; Musk says the Robotaxi will cost that much, and having a competing vehicle isn’t in the plan. The low-price model won’t be a significant growth driver because the company is focused on autonomous; that won’t be viable for at least another year, probably longer. The core business is expected to boom again, but that may not happen until 2026 or later when the cybercab dream becomes a reality. 

Optimistic Analysts Lift Price Targets for Tesla: Upside is Limited

The analysts' response to Tesla’s results and outlook is optimistically cautious. No analysts upgraded the stock, but most increased their price targets, lifting the consensus target by nearly 4% overnight. However, the sentiment remains pegged firmly at Hold, with 45% of ratings at Hold or equivalent levels, 22% rating at Sell, and the remainder at Buy. The increase in price target may sustain an upward lift in the market but has already been outrun by market action and remains within the 12-month range and below critical resistance points, a potential headwind for price action. 

Tesla stock popped over 15% in premarket action and may continue to rise. However, the move remains below the top of the established range where it will likely remain. The critical resistance point is near $260 and might be tested by the market soon. A sustained rally may form if the market can move above it and sustain the move. The more likely scenario is that the market will provide another show of resistance that keeps it within its range as the debate on how to value Tesla continues. Trading above 60X its earnings, it is a highly-valued company no matter the comparison.