Earlier this month, I published my first article devoted entirely to Tesla Motors (TSLA). While I had discussed the name several times in other articles, it was the first time I had focused solely on the electric car maker. My conclusion was that the bull case had cracked a bit, but that there was still potential for upside.
That last article was right after the car fire news, which sent Tesla shares down nearly $25 from their 52-week and all-time high. I told investors that they could use the pullback as a buying opportunity, and shares did rebound by almost $20 in a matter of days, before coming down again with the rest of the momentum names and the market. Now that shares have settled down from the car fire frenzy, it's time to take another serious look at Tesla. Here are some key numbers to watch going forward.
1. Obviously, the earnings report:
The biggest number to watch over the next month or so will be the company's fiscal Q3 report. As of the time this article was submitted for publication, Tesla had not officially announced a date for the report. The first two quarterly reports for the 2013 year were in early May and August, so I would assume that the week of November 4th to 8th could be a likely time frame. That's my best guess currently.
So when it comes down to current estimates, analysts are expecting $533.10 million in revenues, which would represent 964% growth from the prior year period figure of $50.10 million. On an adjusted (non-GAAP) earnings per share front, analysts are looking for a profit of $0.12, as compared to a $0.92 loss in the year ago quarter.
Obviously, the number of vehicle sales will be important too. Recently, a Jefferies analyst upped their price target to $210. The firm upped its sales estimate for the quarter from 5,350 vehicles to 5,500. Tesla had record sales of 5,150 Model S vehicles in North America during Q2. Recently, there has been widespread speculation as to what VIN numbers mean for Tesla's sales figures. Personally, if I had to guess, I'd be looking for 5,600 to 5,700 sales in Q3. Additionally, investors will be looking to see if Tesla improved on its 22% non-GAAP gross margin figure from Q2. With such a large run in Tesla shares, investors might be looking for that "more than perfect" report. If Tesla beats, but not impressively, it may not be enough to hold the rally. This earnings report could easily be a "buy the rumor, sell the news" event, so Tesla needs to be firing on all cylinders, both literally and figuratively.
2. The balance sheet and associated data:
Tesla's balance sheet has been an interesting thing to watch. It's been on a roller-coaster ride, and a number of major items have really changed things lately. The table below shows some key financial ratios since the end of 2011. Dollar values in thousands.
*Liabilities to Assets ratio.
The balance sheet was getting weaker by the quarter, with the bottom hit in that Q3 period of 2012. In the following two quarters, the numbers got better, but the most important item was the capital raise in May 2013. Tesla sold stock and convertible debt, and CEO Elon Musk invested another $100 million into the name. In addition, Tesla was able to pay off their DOE loan. As you can see from the chart above, the capital infusion greatly changed the complexion of the balance sheet. While shareholders have been further diluted, and they will continue to be for the indefinite future, Tesla now has more cash than debt, and the balance sheet looks much stronger. They echoed these thoughts in the Q2 investor letter.
So it will be interesting to see where the balance sheet is at the end of their Q3 period, but there is another item to consider. The convertible notes, which carry a 1.5% annual interest rate, may be in line for conversion soon. Why do I say that? Well, the following statement about the convertible debt was taken from their second quarter 10-Q filing.
Each $1,000 of principal of the Notes will initially be convertible into 8.0306 shares of our common stock, which is equivalent to an initial conversion price of approximately $124.52 per share, subject to adjustment upon the occurrence of specified events. Holders of the Notes may convert their Notes at their option on or after March 1, 2018. Further, holders of the Notes may convert their Notes at their option prior to March 1, 2018, only under the following circumstances: (1) during any fiscal quarter beginning after the fiscal quarter ending September 30, 2013, if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during the last 30 consecutive trading days of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five business day period following any five consecutive trading day period in which the trading price for the Notes is less than 98% of the average of the closing sale price of our common stock for each day during such five trading day period; (3) if we make specified distributions to holders of our common stock or if specified corporate transactions occur. Upon conversion, we would pay the holders the cash and, if applicable, shares of our common stock (subject to our right to deliver cash in lieu of all or a portion of such shares of our common stock) based on a daily conversion value, as defined. As of June 30, 2013, none of the conditions allowing holders of the Notes to convert have been met.
It's circumstance number 1 that really is key. Based on the conversion price above of $124.52, 130% of the conversion price is approximately $161.88. Tesla shares are well above that price now, and they've only closed below that level once since August 26th. By the time Tesla reports, whenever that may be, it would seem that these notes would be eligible for conversion, assuming the stock stays above that level. We're past the September 30th ending quarter, and the stock has already closed above the 130% mark in all 9 days of October.
There are two potential benefits to these notes being converted. First, because they are interest paying notes, it would reduce the company's interest expense over time. That would help with profitability, which has been a criticism of Tesla bears. Second, it would move debt on the balance sheet into equity, which would improve some of the company's financial ratios. If all of the notes were to be converted, it would mean Tesla would have no outstanding debt (when excluding the company's regular liabilities).
3. Days to cover ratio:
Tesla saw a very small decline in short interest at the latest update. Short interest declined by about 90 thousand shares, putting the end of September number at approximately 20.93 million. Using the float and outstanding share counts from Yahoo! Finance, this means that about 17.23% of the outstanding share count and 26.87% of the float are short. Usually, a short/float number above 25% means the stock is a pretty good short candidate.
In my last Tesla article, I argued the opposite, however, because Tesla is a high volume stock. Even though a large amount of the float was short, it would only take short sellers a little more than 2 trading days to cover all of their positions. A days to cover ratio around 2 isn't that high, meaning a short squeeze isn't tremendously likely. I showed a days to cover chart in my last article, showing how the days to cover ratio had plunged from its late 2012 highs, where it peaked around 44. By the summer of 2013, thanks to the heavy trading volume in the stock, the days to cover ratio was down to a low of 1.18. However, the latest update showed the highest day to cover ratio since the start of May, as you can see from the chart below. I took out the end of April figure of 7.96 because it greatly skews the chart.
What's the main point here? Well, if the days to cover ratio were to continue higher, maybe get back into the mid or high single digits, Tesla could become an interesting short squeeze candidate again. Right now, that doesn't look like it will happen just yet. Tesla's volume has picked back up in early October, thanks to that care fire news. September was a very weak volume month for the stock, and there was clearly investor fatigue regarding this name. The car fire news resulted in two consecutive volume days above 20 million, the first time that had happened since the middle of July. It will be interesting to see how Tesla's volume fares up until earnings, as things have calmed down a little lately. These volume numbers will have a large impact on the days to cover ratio.
4. 50-day moving average:
I don't want technical analysis to be the major point of my analysis, but I will bring it up here. This past week, Tesla's stock has been relatively close to its 50-day moving average. In fact, as you can see from the chart below, it's basically the closest the stock has been to this moving average since the large rally started earlier this year.
(Source: Yahoo! Finance)
The 50-day moving average is in the mid $160s right now, and should be in the upper $160s as we move further along this week. Since the stock really hasn't tested this technical level in quite a while, we don't know how it will react if it hits the level. But it is interesting to note we are close to it, and it is possible that this technical level could be broken before earnings. It will be interesting to see how the stock reacts if we do break below the 50-day.
There are several key numbers to watch when it comes to Tesla, and today I presented a couple that I believe are crucial. Obviously, the earnings report coming up will be a huge factor in where shares go from here. At the report, we may find out that Tesla is about to be debt free, if the holders of the convertible notes decide to swap their debt for equity. It will be interesting to see how short sellers set up their positions going into the report, as weak volume in September started to push up the days to cover ratio. Are we starting to see volume fatigue in Tesla? Other than the days following the car fire, it seems that could be the case. Also, Tesla shares nearly hit the 50-day moving average last week, the closest they've been to that key technical level since the major rally started. I still am bullish on shares for the near term, and I stand by my statement that we will see $200. Perhaps, if the government gets back in order, a market rally will help push those shares to that level. I wouldn't be surprised if we crack $200 before earnings, but if shares get too inflated into the report, investors should tread very carefully.
Additional disclosure: Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.