Second thoughts on Tesla

Tesla, Inc. shares have shed more than 30pc in the year-to-date period amid worries concerning the COVID-19 lockdowns in China and worsening macroeconomic fundamentals. UBS analyst Patrick Hummel has upgraded Tesla shares from Neutral to Buy and maintained the price target at $1,100.

“The Tesla Thesis according to Hummel: Tesla boasts of a record-high order backlog and it also benefits from the ramp-up of two new gigafactories. The company is seeing margin momentum. After dipping in the second quarter, auto gross margin should structurally exceed 30pc, thanks to pricing and process innovation. Tesla has a structural competitive edge in key supply chains, which would lead to superior growth and profitability. Integration represents a strong competitive edge in an environment of structurally tight supply chains. Tesla’s stable dominant global battery electric vehicle market share of about 20pc suggests the company is well positioned to become one of the top three global automakers by 2030. He also said the 10pc salaried staff reduction doesn’t change the long-term outlook. The operational outlook is stronger than ever before. Hummel lowered his 2022 earnings per share estimate for Tesla by 12pc to account for the Shanghai lockdown. The 50pc growth target will still be met. He raised his EPS estimates for the next three years by up to 40pc, resulting in 2025 EPS of $28. This, according to the firm, can be achieved mostly with the already-know products and production facilities.”

If we look at the Tesla chart in the light of these comments we still need to be careful. We certainly wouldn’t want to see a sharp breakdown below the latest red line in the chart but I don’t think that is going to happen. The alternative is that we get a new Coppock buy signal and the last two produced amazing results. I will be watching and if the next big signal is a buy signal as I now expect I will let you know. Meanwhile the appropriate stance with Tesla as with almost all shares presently is to be out not in watching for buy signals.

Jumping the gun on Nio

The electric car maker which I have recommended is Nio. This was jumping the gun because we don’t have any of my 3B buy signals yet. But if I just look at the chart I see a stock that is on the turn from bear to bull. Coppock has worked brilliantly with this stock in the past and is flattening out after a steep fall since February 2021. The next upturn, which could be imminent, will be exciting and all my 3B indicators are poised to signal buy together if we get positive price action from the stock. The business is doing well considering the supply and lockdown challenges.

“Although we went through many challenges in the first half of 2022, 2022 is still a critical year for NIO to make committed investments and efforts in new products, core technologies, global market entry and the mass market brand. In the second half of this year, we will accelerate our new product delivery and the capacity expansion. We are confident of and look forward to realizing satisfying results in 2022.”

My strategy is to add to my holding in the event of a confirmed buy signal so that I give myself an attractive entry price. The valuation has undergone a dramatic reset. In 2020 these shares were on nearly 30 times revenue. By 2024 after the share price fall and with strong growth continuing that figure could be close to one. The group also has exciting plans for international expansion.

“With respect to the global market, while further expanding our sales and service network and improving the user satisfaction in Norway, our teams have been accelerating preparations to launch our products and services in Germany, The Netherlands, Sweden and Denmark.”

Another thing about Nio is that the shares dropped very low in 2019 but that was when investors were expecting the company to go bankrupt. It was rescued and has since gone from strength to strength. The company now has no debt and around $3.5bn in cash and there is a ton of innovation going on. I am not recommending them again here. I have already done that so the next recommendation will be on a confirmed 3B buy signal.