Tesla & # 39; s 3-month weak rally; Execution strength to be implemented

Tesla (NASDAQ 🙂 investors can hardly take a break from the bad news stream. Last month, Walmart (NYSE 🙂 was charged with the electric car maker and blamed his defective batteries for causing a fire in at least seven of his stores. And who knows what it says in September.

But in the midst of this endless cycle of setbacks, Tesla shares have risen enormously, in a rebound that began in June. Despite the occasional dip, such as yesterday, when the stock closed 0.3% at $ 225.01, shares have gained more than 22% in the last three months at a time when the benchmark saw highly volatile trading and investors avoided growth stocks.

And yet, Tesla shares are still falling by more than 30% this year, hurt by a series of missteps and concerns that the car manufacturer is finding it difficult to grow the order book for its electric cars and its bills. to balance.

The recent rally could be short-lived, given the boom-and-bust pattern of Tesla shares, but it shows a positive change: investors are increasingly buying the new story from CEO Elon Musk that emphasizes the expansion of production capacity and model line-up, instead of achieving bottom-line profitability.

Tesla is now aiming for break-even in the current quarter, after the car manufacturer had a larger-than-expected loss in the second quarter in July. The company sees a return to profitability during the last three months of the year.

Volume growth, capacity expansion

In a letter to the shareholders in July, Musk emphasized that "continuous volume growth, capacity expansion and cash generation will remain the main focus", adding that Tesla is working on expanding the "production footprint in new regions & launches of new products and continue to improve the customer experience while sustainably generating and using cash. ”

With that rhetoric, fortunately investors see a number of positive developments in the field that help the stock to maintain momentum. Last week Tesla won a 10% purchase tax exemption on the vehicles it sells in China, despite trade tensions between the country and the US

The exemption, aimed at domestic electric vehicle manufacturers, benefits all Tesla models sold in China. The company is currently importing all the cars it sells in the Asian country, but plans to make Model 3, the best-selling vehicle, in its new factory in China, which is likely to start production at the end of this year. .

In Europe, demand for the Model 3 sedan has been stable, and this should offset some of the weakness in China, Wedbush analyst Daniel Ives wrote in a recent note. These positive comments coincide with the recent assessment by Moody & # 39; s Investors Service of the company's credit outlook, stating that it has changed from negative to stable. The reason given is an improvement of the production systems of Model 3.

"The stable outlook expects that improving the operational efficiency of model 3, the growing sales of regulatory loans and a sufficient liquidity position will be a sufficient starting point to continue cost-saving initiatives that improve profitability in light of aggressive expansion plans, "Moody & # 39; s said in a note about Tesla.

However, with this positive assessment, the sales of the older and more profitable vehicles, the Model S and X, remain weak, which damages margins and cash generation. In the US, growth for these cars came to a halt after a strong end to the second quarter, and Tesla should see a strong order flow in September to reach its aggressive third quarter guidance, according to Ives.

Bottom Line

Despite some positive news streams in recent weeks, the demand for his cars and the company's ability to make a profit are the two factors that will decide whether Tesla shares are a good long-term investment. If Tesla is able to quickly turn around on these fronts without the CEO generating more controversies, it will certainly give a positive signal for its stock.

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