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Our Analysis of Tesla Inc. (TSLA)
The HX Research “Quantamental” Approach
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My journey as a financial analyst began more than thirty-five years ago. That was way back in high school when I first entered a stock-picking contest for my Economics class.
I won that contest easily and will one day share an instructive story about it, but that was the first time I ever looked at any stocks or companies.
My stock research career began with resources like the publication Investor’s Business Daily and the stock write-ups in Value Line.
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It continued during my education at the Wharton School of Business at the University of Pennsylvania. There were several investment clubs where my fellow students taught me ten times what I learned in my classes. These clubs and some terrific books (my top ten reading list is here) set me up to start my career as a stock picker, portfolio manager, and trader.
My career as a professional investor began in 1996, and over the next twenty years, I raised and managed billions for institutional investors and high-net-worth investors.
Over that time, I honed my approach by combining pieces from many distinct types of investing. Eventually, I settled on an approach that combined both qualitative (fundamental) and quantitative analysis.
I didn’t coin the term, but this is called a “Quantamental” approach.
The idea is that both company fundamentals and technicals drive success in TRADING and INVESTING.
This approach is what we now use at HX Research, and it drives both types of strategies for our publications: the TRADING publications—HX Trader and HX Income—and the INVESTING publication—HX Legacy.
Those of you who receive our PAID publications are familiar with our approach.
Beginning with today’s HX Daily, we will use this approach on one popular stock a week. We will analyze the most popular stocks and give you an idea of what our system is telling us.
These are not formal recommendations on these stocks. Based on what our analysis tells us, we are giving our views of what we think is most likely to happen from here.
With Tesla Inc.'s (NASDAQ: TSLA) recent run, we thought we would start with this stock.
1. RSI Analysis
Our favorite technical analysis tool for assessing the short-term probability of stock prices is the "relative strength index" (RSI).
This measures how overbought or oversold a stock is and measures the "velocity" of the most recent 14 days of stock price movement. A high number (above 70) means the stock has gone up a lot very quickly. A low number (below 30) means the stock has rapidly decreased.
The RSI usually doesn't tell us much about a stock. If it is between 30 and 70, then it is not very valuable.
Extreme readings, though, can give us some visibility into the next most probable move in the stock.
Here is the recent TSLA stock chart, along with the RSI reading…
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Right now, the RSI on TSLA stock price is above 85.
This is a rare reading, occurring only 25 times since 2010. Over 3,500 trading days occurred in that period, which was only 0.71% of all occurrences.
Taking out the volatile period around COVID-19 in 2020, there have been four times the stock has seen this reading. Here is a table showing those periods and how the stock performed afterward…
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This data is similar to what happens to many stocks with an extremely high RSI reading. Given the high velocity of the upward move in the stock price, they are most likely to need to take a breather.
The stock was much more volatile in 2013, but looking at the most recent occurrences, it was lower most of the time. The last two times, it was lower by a fair amount.
Honestly, we are surprised by the 90-day data. While it is common for a stock to take a rest after such an overbought reading, it is typical that it would be higher in 90 days.
The data set here is small, but we think a tactical view of the stock would suggest caution in the near term.
RSI ANALYSIS = AVOID.
2. Earnings Revisions
We think the most potent drivers of stock prices are revisions of the financial metrics.
We refer to them as “earnings” revisions, but they can also be revenue revisions. We usually look at the most popular measure—earnings Per Share (EPS)—and other measures, such as Earnings Before Interest, Depreciation, and Amortization (EBITDA).
We think revenue and EPS are most important for TSLA, and here are those charts…
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These are some ugly charts.
Eighteen months ago, TSLA was expected to generate over $145 billion in revenue and over $7 in EPS in 2024. Now, those numbers are less than $100 billion and $2.50 in EPS.
THIS is the reason the stock is down so much.
Stock prices closely follow these revisions, which has been the case with TSLA stock.
The real question now becomes, what happens next to these numbers?
If you look very closely at the chart, you will see that these estimates have slightly increased just in the last week.
This has happened to the estimates before but has not been sustained.
We think the stock responded strongly this time because of the growth in short interest. Here is that chart…
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You can see that from a low of 60 million shares short in mid-2022, the stock recently hit a high of 107 million shares. This is not only an absolute high but also as a percentage of volume.
Relative to the overall volume of the stock, though these are not big numbers.
We think this short interest helped contribute to the move higher but was not the primary motive.
Ultimately, we think that with TSLA stock having such a large weighting in the S&P 500 of a little bit more than 1% (13th largest) and many portfolio managers having been burnt by the rapid rise in NVIDIA Corporation (NASDAQ: NVDA), many ran to cover their underweighting.
If we saw these revenue and EPS numbers bottom and begin to move higher over several months, we would consider this a very bullish sign. Until they do so, though, we would avoid the stock.
Instead, we would buy the stock up another +50% with two months of stable to positive revisions rather than get involved now.
EARNINGS REVISIONS = AVOID
3. Earnings Growth
The final measures we focus on are the actual growth in the revenue and earnings.
Here is the table showing TSLA's expectations for revenue and earnings for the next few quarters (and years).
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Looking at these growth rates, we see a similar picture to the earnings revisions.
After showing massive growth in revenue and EPS during 2021 and 2022, the company saw a significant slowdown in revenue growth and big declines in EPS.
This also helps explain the decline in the stock.
It is almost impossible for a stock like TSLA to go up with declining absolute numbers and negative revisions. In fact, it is nearly certain that the stock will go down.
That is precisely what happened here.
Again, the real question is, what will happen next?
If you believe the analyst estimates, revenue and EPS growth should stabilize after the coming quarter. They should bottom out in the year's second half, and then TSLA should return to BIG growth in 2025.
We think that IF this happens, then TSLA is likely to be a good – if not great – stock.
With the revenue and earnings, that is still a big "IF"; if it doesn't happen, we don't think the stock will do much. It will likely go back down.
What do you think of TSLA stock right now? Tell us more at [email protected] or in the comments section online.
Conclusion
We see a lot of potential for TSLA stock in the next 12 months. IF the company can show the growth the analysts expect AND revisions can bottom out (if not higher), then we think the stock could explode.
There is no reason it couldn’t see the same performance that fellow mega-cap company Meta Platforms, Inc. (NASDAQ: META) saw in a comparable situation eighteen months ago.
If the company can meet its numbers, we think the stock could return to its old highs or almost double from these levels.
Given the stock's huge move in recent weeks, we would avoid buying shares here and wait for fundamental progress before getting involved.
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