A great earnings report from Elon Musk’s Tesla on Wednesday reignited the dreams of Tesla bulls. Before investors get pulled in too fast, slow down. There are other factors at play here.
Let’s explore this with the help of a chart. Please click here for an annotated chart of Tesla TSLA stock.
Note the following:
• The chart shows the gap up in Tesla stock after the earnings report was released.
• Tesla reported earnings that were better than the consensus and the whisper numbers. Stocks move based on the difference between the whisper numbers and the actual reported earnings and projections.
• Investors should look at the big up move in Tesla stock shown on the chart in the proper context. The proper context is the median move in Tesla stock over the past eight quarters is 7.7%.
• Tesla says it sees positive quarterly free cash flow in the future. This is a huge positive for Tesla stock.
• Tesla sees positive GAAP net income in the future. This is a big positive for Tesla stock.
• Tesla says self-driving “appears to be on track” for year-end release. This is a big positive and if it actually happens, it may give Tesla stock another push up.
• A careful analysis of the earnings shows that Tesla appears to be succeeding at controlling costs. This is a big positive.
• Tesla says its Shanghai Gigafactory is ahead of schedule. This is a positive.
• In spite of all the positives, Tesla’s valuation is highly stretched. This is huge negative.
• Irrespective of how well Tesla does, strong competition is ahead. This is a huge negative.
• The biggest risk to Tesla stock is that someday Wall Street may start valuing Tesla like a car company. In contrast, right now valuation of Tesla stock is based on dreams.
• The chart shows an earlier Arora Report call that in a short squeeze, Tesla stock can quickly move to $300. This is exactly what has happened now. Interestingly this call was made when Tesla stock was in free-fall and trading around $190.
• According to algorithms at The Arora Report, about 60% of the up move in Tesla stock is the result of a short squeeze.
• Going into earnings, the segmented money flow chart that The Arora Report published showed smart-money flows were neutral in Tesla stock, momo (momentum) crowd money flows were mildly positive and short-squeeze flows were extremely positive. Segmented money flows are like an X-ray that show what is happening beneath the surface. To learn about segmented money flows, please see, “Momentum investors are now buying shares of Apple, Amazon and Netflix.”
• So far after the earnings report, there is no smart money buying. It is all about the momo crowd and a short squeeze. This is a negative.
• The chart shows that the prior downtrend in Tesla stock is decisively broken and now Tesla stock is in an uptrend. This is a positive….Read more at MarketWatch.
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