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Will Tesla's share price stay in the fast lane?

Tesla's [TSLA] share price didn't just smash through the $1000 level last week, it left it well and truly in the rearview mirror. Fueling these gains were better-than-expected deliveries and hopes that the company could break even in Q2. 

Despite this positivity, questions remain over the possible impact of price cuts on costs and longer-term competition. So is it time for traders to jump in on the share price, or should they wait for a dip?

 

 

Why is Tesla's share price accelerating right now?

Tesla's share price rose 5.2% in a single day to close at $1,009.35 last Monday 29 June, as Wall Street backed the electric car manufacturer’s prospects post-coronavirus. Tesla’s share price was further boosted by a note, sent by Elon Musk and seen by Bloomberg, suggesting that the company could break even in Q2. 

“Breaking even is looking super tight. Really makes a difference for every car you build and deliver. Please go all out to ensure victory!” Musk wrote in the letter.

Since this suggestion, Tesla's share price has been sitting consistently in high gear, maintaining a solid run above $1,200 through 2 July’s close, up almost 25% from the start of the week. News that Tesla had delivered 90,650 vehicles in the second quarter, breaking through analysts’ expectations of 74,130, helped this momentum even more.

90,650

Number of vehicles delivered by Tesla in Q2

  

Deliveries have been aided by a rapid increase in the productivity of Tesla's Shanghai car plant. Opened in January, the plant has been largely unaffected by the coronavirus outbreak, offsetting some of the disruption seen at the company's Fremont plant and allowing Tesla’s share price to bounce back from its lockdown dip in March.

These hikes in Tesla’s share price saw the company overtake Toyota to become the world's most valuable carmaker. As Robinhood points out, the company is now worth more than ExxonMobil, which was the most valuable company in the world when Tesla went public. 

 

What’s next for Tesla’s share price?

Optimism is high at Tesla and, with such impressive numbers, there's a chance the company could break even. Considering net income in 2019 was -$862 million, this would mark an incredible turnaround for the company, and would put Tesla on track for inclusion on the S&P 500.

“Expectations are high, yet it’s unclear to us how the stock will be challenged. With an S&P add expected in 2020, it would be further support for the stock,” wrote Credit Suisse analyst Dan Levy.

“Expectations are high, yet it’s unclear to us how the stock will be challenged. With an S&P add expected in 2020, it would be further support for the stock” - Credit Suisse analyst Dan Levy

 

Despite the gains, there is a danger that Tesla's share price is getting too far ahead of the underlying business. One sceptic is analyst Adam Jones at Morgan Stanley. At the start of June, Jones downgraded Tesla from Equal Weight to Underweight, and reduced his price target from $680 to $650. The reason? Post-coronavirus drops in demand, long-term competition from companies like Amazon and price cuts in China.

"In recent weeks, Tesla has announced price cuts in China and the US across its model range that we had not previously incorporated into our forecasts, until now," Jones wrote in a note to investors.

Price cuts were also part of Goldman Sachs’s decision to downgrade Tesla from Buy to Neutral in June. Price cutting could put Tesla's hopes of breaking even in danger. If these cuts dent production costs in coming quarters then Tesla's share price gains could go into reverse.

 

Market Cap$224.176bn
Operating Margin (TTM)3.23%
EPS (TTM)-0.81
Quarterly Revenue Growth (YoY)31.8%

Tesla share price vitals, Yahoo Finance, 6 July 2020

 

What do the analysts think?

Of the 23 analysts offering ratings on Tesla, 8 rate it a Strong Buy or a Buy. Those who are offering price targets place an average of $706.14 on the stock. This would represent a 41.6% downside on Tesla's current share price (through 2 July’s close). Given the stock’s ascent, it will be worth seeing whether analysts revisit their price targets soon.

For now, Wall Street looks to be betting big on the company, extending its lead in electric cars. Traders will have to decide whether Tesla’s share price suggests that now is the time to buy, or if it's worth waiting for things to slow down first.

Disclaimer Past performance is not a reliable indicator of future results.

CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

CMC Markets does not endorse or offer opinion on the trading strategies used by the author. Their trading strategies do not guarantee any return and CMC Markets shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein.

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