Making Sense of Tesla's Red-Hot Rally

Unpacking what to expect for Tesla's quarterly earnings

Jul 21, 2020 at 1:52 PM
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Everyone in the investing world is talking about Tesla Inc (NASDAQ:TSLA). Those worn out from hearing about Elon Musk and his electric car company may want to bury their heads in the sand for the next week, with Tesla set to report second-quarter earnings after-the-close on Wednesday, July 22. Ahead of the event, there are a few things to know about TSLA – and stocks in general -- before making any type of informed investing decision.

To the surprise of nobody, Tesla stock has a history of volatile post-earnings moves. Of the eight previous reports, four have been double-digit moves in either direction. Ironically, it's most muted post-earnings reaction came as the world craziness was hitting a fever pitch; a 2.3% drop on April 30. Following its October 2019 quarterly report, TSLA saw a swing upward of 17%, and in July 2019, TSLA suffered a post-earnings drop of 13.6%. The security averages a 9.3% swing, regardless of direction, the day after its last eight reports, and this time around, the options pits are pricing in 16.8% shift.

You didn't need a bunch of data courtesy of Trade-Alert to come to that conclusion. In the past six months alone, TSLA has logged double-digit percentage moves 17 times. It's a volatile stock that happens to be riding the momentum higher at the moment. But how long will this volatility to the upside last? Judging strictly by market cap, Elon Musk and company are here to stay; Tesla leads the auto industry with a $253.8 billion market cap. For perspective, the second and third auto companies in market cap are Toyota Motor (TM) and Honda Motor (HM), and their combined totals come out to roughly $253.61 billion, just a chip-shot away from TSLA’s.

Yet for all that technical prowess, analysts remain staunchly on the sidelines. There are 22 brokerages covering Tesla stock, and 17 dole out "hold" or worse rating. And it's not just upgrades or downgrades; TSLA's consensus 12-month price target of $843.77 is a whopping 44% discount to Friday's afternoon perch near $1,515. Short sellers have been heading for the exits, down 13.2% in the two most reporting periods. Yet that still accounts for a healthy 9.5% of the equity's total available float, indicating there's ample amount of buying power still lingering that could unwind and keep the wind at TSLA's back.

Now of course, there are caveats. During Tesla's race up the charts, the security has burrowed deep into overbought territory and now sports a 14-day Relative Strength Index (RSI) of 75. That's a bit lower than July 10's nearly six-month high of 85.25, but still enough to consider that a short-term breather could be on the horizon for TSLA.


Plus, it should be warned that those looking to speculate on Tesla stock with options will need to pay up for premiums at the moment, not a surprise considering earnings looming next week. The equity's 30-day at-the-money (ATM) implied volatility (IV) right now is 120.1% and ranks in the 96th annual percentile, hinting at higher-than-normal volatility expectations.

There are seasonal trends to consider though, as seen below. According to research done by Schaeffer's Senior Quantitative Analyst Chris Prybal, the first month of each quarter is the most bullish time for investors. Looking closer at these respective months, the Invesco QQQ Trust Exchange Traded Fund (ETF) (QQQ) show respective monthly returns of 0.8%, 2.3%, 1.4%, and 3.4% for the start of each quarter. So if the tech-heavy QQQ is in the midst of a bullish month, there's a good chance it will positively impact one of the ETF's hottest stocks.

QQQ COTW July 17

Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, July 19.


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