The Charts Offer a Surprising Message on Tesla

Tesla (Nasdaq: TSLA) is the company that some investors and analysts have an emotional relationship with. Some love the company and others hate the electric car maker. Both reactions seem to be due, in large part, to reactions to the company’s CEO Elon Musk.

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  • Musk has been the CEO and chairman of the Board of Directors but agreed to step down in a recent settlement with the Securities and Exchange Commission (SEC).

    The SEC began investigating Musk after one of his tweets attracted the interest of investors, and regulators. The terms of the settlement would be in the best interests of investors.

    Under the terms of the deal, Musk has to pay a $20 million fine and step down as Tesla chairman for a period of at least three years. Tesla must also put in place a system for monitoring Musk’s statements to the public about the company, whether on Twitter, blog posts or any other medium.

    Tesla will have to pay a separate $20 million fine, and appoint two independent directors to the board. One of those can be the chairman that replaces Musk, provided that person comes from outside Tesla and its affiliates.

    The tweet that led to the settlement implied that the company was being taken private.

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  • Shares jumped on the news but quickly fell after it became apparent there was no deal in place.

    In the SEC settlement, the agency explained how they believe that Musk came to that price,

    “We allege that Musk had arrived at the price of $420 by assuming a 20 percent premium of what Tesla’s then existing share price (was), and then rounding up to $420 because of the significance of that number in marijuana culture, and his belief that his girlfriend would be amused by it.”

    Musk Has Good and Bad Qualities

    Obviously, investors were not initially impressed by Musk’s attempt to amuse his girlfriend. And the fact that he thought he should amuse her with a tweet about a stock price raises serious concerns for many investors.

    The truth is Musk is most likely the reason for the company’s success and he has led the company through some large successes and come close to failure. Barron’s noted at the end of November that Musk admitted Tesla almost failed:

    In “…an episode of HBO’s Axios miniseries…Musk said his company was within months of death as it worked on production issues with its Model 3 sedan.

    “Tesla really faced a severe threat of death due to the Model 3 production ramp,” Musk said. “Essentially, the company was bleeding money like crazy, and just if we didn’t solve these problems in a very short period of time we would die.”

    At one point, Musk revisited the long days he spent on the Tesla assembly line as the company worked on building more Model 3s, saying that “I just did it because if I didn’t do it, then [there was a] good chance Tesla would die.”

    In saving the company, Musk demonstrated his value to share holders. While some share holders might prefer that the CEO take a less public role, that would not be who Elon Musk is and that individual is the driving force behind TSLA.

    From a Joke to a Price Target

    Tesla is a company that is turning the corner on profitability in the view of many analysts.

    Analysts the company to report a loss of about $1.50 this year. Next year, the analysts expect the company to report earnings per share (EPS) of $6.54. A total of 27 analysts have published forecasts for 2019, ranging from a loss of about $0.36 per share to EPS of more than $19 with an average value of $6.54.

    In 2020, there are 23 published earnings forecasts ranging from as low as EPS of $2.03 to as high as $20.40. The average of all estimates is $11.17 and this is generally known as the consensus forecast.

    Standard & Poor’s estimates that EPS will reach $19.30 in 2021 and $27.43 in 2022.

    Clearly, if the company meets these forecasts, the stock offers a great deal of value. Based on fundamentals, analysts expect the stock to be worth as much as $530 a share. The price chart below indicates a target of about $495 is reasonable.

    The blue rectangle in the chart highlights the stock’s recent trading range. Technical analysts believe that a trading range can be used to develop a price target. They measure the depth of the range, which is defined as the distance between the high and the low. Then they add the depth to the break out point.

    That technique provides an upside target of $495 for TSLA assuming an up side break out of the trading range. The stochastics indicator at the bottom of the chart indicates an up side break is most likely.

    Stochastics is a popular momentum indicator. Technical analysts expect momentum to lead the price action. That’s because of the way the indicator is calculated which is an attempt to quantify the urgency of buyers relative to the urgency of sellers.

    In the chart, we can see that momentum was moving lower at the time Musk tweeted his $420 target price. In that case, momentum led price action. Now, momentum is pointing higher.

    The chart above uses weekly data and stochastics tend to move a high level, above 80 as it is now, and stay there for extend trends. The price of TSLA could break down but the chart favors an up trend and the chart projects a large profit for aggressive investors.

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