All eyes will be on Tesla Inc. (NasdaqGS:TSLA) today when the company reports its earnings after the close. That focus will immediately shift to how the stock trades after hours based on raw numbers.
Then the stock is going to hang on every word out of Elon Musk and management on their earnings call.
The only question is: Which way will the stock go?
Either way, it’s likely to be a big move.
I believe I know where the stock is going – and why.
Plus, I show you how to play it – if you think I’m right…
The New Big Top
Tesla’s negative earnings (meaning their losses per share) have been higher than analysts’ consensus estimates for the past three quarters.
This quarter, analysts think Tesla is in for a loss of $3.61 a share.
And in my Zenith Trading Circle trading research service, we’re already all over Tesla. We’re short the stock at $335.15. Back when I made that recommendation on July 2, 2018, I also recommended buying TSLA December 21, 2018 $330 Puts (TSLA181221P00330000) for $40.
The stock’s down to around $293 as I write this, and the puts are trading at almost $56.
So far, so good.
If I’m right, the company’s earnings will confirm what I’ve been saying about Tesla’s production, its reservation list, and its cash flow – and the stock will tank. If I’m wrong, it will make the stock jump.
There are a lot of issues at Tesla, but the three that are key are:
- How many cars they are producing, and at what cost in terms of time, money, and quality control;
- What’s really happening with the 420,000 potential customers on the waiting list – who will step up and pay how much for what options, and who will drop off altogether; and
- The cash-flow situation – whether Tesla can generate enough to keep producing, keep building new facilities, keep hiring, or whether they will need more capital.
On production, at least according to Musk’s tweets, Tesla has reached the long-ago advertised 5,000 Model 3 cars-per-week production mark.
It matters that they managed that by having to erect a tent next to their factory and hire a ton of people to swing from trapezes under the new big top.
There’s a lot less automation under the canvas and a lot more hard labor going into manufacturing. I’d be worried about roll, bottlenecks, and especially quality control.
We’ll see what the raw numbers say about regular production, head count, and operating expenses.
Then we’ll hear the spin by management if they’re off, or hear the sound of backslapping on the call if the numbers are decent and the stock’s climbing the wall of worry it’s facing.
What You Can Do Now
Next up, I want to know about conversion rates. How many reservations are being converted at what pace? What’s the list down to? And, for cash flow, what are Model 3s going for?
Originally, the sticker was supposed to be $35,000. The base is now close to $49,000. With all the bells and whistles and tech options galore, the Model 3 gets up to $80,000. What they go for, on average, will be telling.
Tesla needs to sell a ton of options to get their margins up. They raised the base price because at $35,000 they didn’t have any margin worth their ringleader’s carnival barking act.
I also want to know who’s off the list and asking for their money back.
Last, but certainly not least in terms of the long list analysts will be checking off, is the question of cash flow. Specifically, free cash flow – or what the company has after operating expenses and debt service.
Musk has goaded shorts into shorting more stock, so he can hang them with it when he comes out with a rosy cash-flow formula that makes them run to cover while taking the stock through the roof.
But that’s not necessarily the way it’s going to play out.
If metrics are off, especially across the board, the company’s going to have to raise more capital by or in the fourth quarter.
Of course, if they have to raise equity capital, that’s going to dilute shareholders and take the stock down a good few pegs.
I’ve got all kinds of Tesla numbers I’ve shared with my Zenith Trading Circle subscribers. The bottom line is my numbers aren’t positive and certainly not what Elon Musk hopes they’ll be announcing.
If I’m wrong and the stock pops, we’ll see if it can hold whatever gains it makes, and we’ll cover our positions accordingly.
But if I’m right, we’ll be holding on as the stock slides down in double-digit percent terms, like 20%.
The puts on Tesla are expensive, but if you think I’m right and if you think Tesla’s earnings are going to miss (by a lot), then they’ll be worth it.
If that’s how you want to play and don’t mind risking all your capital on a trade, the TSLA August 3, 2018 $250 Puts (TSLA180803P00250000) trading around $2.25 are worth a roll of the dice.
If the stock drops 20% immediately to $230, those puts will be worth at least $20.
It’s a risky play, but Tesla has always been a risky proposition.