Tesla (TSLA) is due for a melt-up, and no the cars aren’t going to catch on fire, but the stock price might. The stock has been very volatile while more or less moving sideways over the last couple of months. While this was needed, it’s time for the stock to look to make the next move up. With Q4 earnings coming on the 26th of January, it could be the catalyst needed to help kick start the stock from current levels. Based on the expectations laid out, Tesla will likely post yet another record quarter, and I believe they will increase deliveries by 50%+ in 2022. I remain bullish on the stock.
What’s Been Dragging Tesla Down?
There are a few things at play here. Firstly, the stock was due for a break after the wild run in October of 2021, I’ll touch on that later. We saw Elon Musk sell off around 13.5 million shares after reaching out to his fans with a Twitter poll as to if he should sell or not. This was quite obviously bearish for the stock as many investors joined him in selling to lock in gains (or pay taxes) at the highs. The bigger impact on both Tesla and the general market, especially the NASDAQ, is the 10-year Treasury Rate. We have seen a steep move in the last month, which is putting some serious pressure on growth names. Tesla, being one of the largest growth names out there, is not immune. The 10-year has moved up to 1.83% and is the highest we have seen since January of 2020.
Why does this matter? Well, when the yield curve steepens, it signifies stronger economic activity and rising inflation expectations. We are already seeing inflation, which means this is more a sign that we could finally see some economic recovery which includes interest rates rising once again. The issue for the high growth names like Tesla is that as rates go up, it means future predicted earnings are worth less today than they were previously. The further in the future an earnings stream is expected, the less valuable it becomes compared with the yield on the safest asset-a Treasury bond. Looking below, we can see that Tesla has really only just entered the profitability stage, and looking below, we can see this is only the start. Even though we have seen the share price drop a bit recently, nothing has changed as far as Tesla is concerned that warrants it, but we are seeing the rotation of funds into the “value” names over the high-growth tech names like Tesla.
What Will Power Tesla Higher?
It’s going to be growth. The impact from the yield curve will be short-term, and the growth isn’t going away. The potential supply chain issues could put a bit of a damper on it, but again these are short-term issues. Tesla releases full Q4 2021 results next Wednesday (January 26th), but let’s start with what we already know. Looking below we can see the delivery numbers for 2021. So much of the Tesla story is dependent on delivery growth, and we are seeing that play out in front of us. The company fell just shy of the 1,000,000 mark coming in at 936,172. This beats the 2020 number by 87%, which is nothing to ignore.
Tesla is famous for its lofty goal of growing deliveries by a rate of 50% per year. This would mean we would need to see ~1.4 million deliveries in 2022. I say they do it. The big drivers here will be the production firing up in both Berlin and Texas. As production ramps up there in 2022, it may ease constraints in Fremont and Shanghai. It will be especially helpful for the brand if it can focus more on local deliveries in China. The path to 1.4 million isn’t that drastic. If Tesla maintains 300,000 per quarter, that would get them to 1.2 million. With two new plants coming online, as long as the supply chain doesn’t get in the way, the path to 1.4 million is pretty clear.
The loftier goal that I do struggle to comprehend at this point is the 20 million per year. I’m not saying it’s impossible by any means, but the company would have to overtake some of the automotive giants. 2021 was an odd year given supply chain issues. For example, we saw Volkswagen post its lowest sales figures in 10 years in 2021 at 8.9 million deliveries. This is a similar story across the board. Tesla wasn’t the only one posting growth though. Some companies like BMW did see record numbers as well (2.21 million deliveries). Now in terms of EVs, we saw over 6.4 million sold in 2021 worldwide, up 26% year-over-year. Regionally speaking, the largest piece of the pie went to China which accounted for 12% of all EV sales in 2021 which was a double from 2020 numbers.
Looking ahead to next Wednesday, what can we expect? Well, analysts are pretty divided. Concerning EPS, the average target is $2.26 with a range of $1.50 – $2.98. The revenue average target is at $16.2 billion with a range of $13.8 billion – $18.3 billion. I think they will report somewhere around $2.65, and $17.5 billion respectively given the boost in sales on the year. Both of these would be a beat and would be great news to come to market with.
As for what’s coming down the pipe for the rest of 2022, several catalysts could help the melt-up thesis. The biggest ones would be the Giga factories in Texas and Berlin firing on all cylinders helping pump out vehicles. I am hoping this also means we get to see the Cybertruck at some point this year. There have been delays, and the production timeline has been removed from the website at this point. But, once they can start to manufacture them, I think it adds another huge piece to the delivery numbers over the next few years. As I mentioned earlier, China’s EV market is growing very quickly. Giga Shanghai continues to expand and exceed expectations, and a large number of the cars produced there, are selling in China. For 2021, we saw 473,078 vehicles coming from China or sold in China. Only 160,000 of those 473,000 vehicles were exported to markets outside of China. The more cars they can produce, the better. And if they don’t have to export them and can grow market share in China, that’s a bonus.
Looking back at North America, we could see EV tax credits come down from governments in both the US and Canada as their respective governments look to promote green energy. This would help several consumers be swayed with regard to price, which is often a roadblock for many. The concern for Tesla at this point is that it could be directed to “union-based companies only” like GM and Ford. If this changes, it would be very bullish for the stock. As I mentioned earlier, I fully expect Tesla to deliver over 1.4 million vehicles in 2022 as they continue to peel away market share from some of the legacy options out there.
What Does The Price Say?
I’ve heard plenty of arguments about whether the stock is overvalued or not, and at the end of the day, it doesn’t matter. If more people are willing to pay the current share price than are not, then it’s fairly valued. Based on forward levered cash flows, we can guess at a “fair value”, but when it comes out at over 100% overvalued, it’s rather meaningless in the current market. There are multiple ways to try and determine what the stock should be trading at, but the reality is the most recent sale is the current value. When something is trading at the multiples that Tesla is and has forward growth rates like Tesla does, we either take the company’s word for their promises or focus on technicals.
Since screaming to new highs in early November of 2021, the stock is down about 20% and has been very volatile, changing directions hard and fast. Contrary to many, I think this is very good. What this allows for is the stock to calm down a bit after a crazy run in late 2021. This is important because as you can see below, the stock had gotten away from the 200-day moving average and there were a couple of options. We could have seen what happened in January of 2021 when the stock crashed 40% to come back to the moving average, or it trades essentially sideways as it has now and allows the moving average to make its way back to the current price without giving up too much value.
The below image is one with notes/lines on it from an article I wrote back on November 8th when we were near the highs. I mentioned that Tesla has a history of giving up 30% after strong rallies as we saw, which is essentially exactly what happened. The target was all based on the “gaps” in price that the stock left behind as it accelerated up. That gap got closed, and then some on December 20th. As you can see the stock left behind another gap that has been yet to be filled right around $940. The stock left no time filling the huge gap up on January 3rd and appears to be looking to head lower to close the gap at $940 as the stock closed under $1000 on Wednesday.
Let’s keep in mind that this isn’t bearish, maybe in the short term, but this would give us a nice double bottom with a positive retest. Setting the stock up for a move to new all-time highs shortly. As mentioned, Tesla is set to report earnings on January 26th (next Wednesday), so we may see some run-up into that starting next week. $1200 is the key level that needs to break before we really start to melt up. If it goes the other way, I have a stop in at $844 as it would have broken support, and likely the 200-day moving average at that point. In the meantime, I have been adding Tesla shares and leaps on the dips.
Wrap-Up
As you can see, Tesla has had a pretty choppy couple of months, but 2022 will be a very strong year for the stock so long as the supply chain issues don’t overwhelm the company. I fully believe we will see over 1.4 million deliveries in 2022 which will exceed the goal of 50% delivery growth year-over-year. As the general market looks to move forward from this recent dip, Tesla will help lead it as it looks to melt up from current levels starting with a strong earnings report next Wednesday. I remain long Tesla.