Tesla Motors designs, develops, manufactures, and sells electric vehicles and electric vehicle powertrain components. The company also provides services for the development of electric powertrain systems and components, and sells electric powertrain components to other automotive manufacturers. Tesla recently released earnings and posted their first profit. On this news share pricing rocketed to a 52 week high in a parabolic move to $97.12. It has since retraced to $81.61 giving up pricing nearly as quickly as it gained. The one-month chart below illustrates the magnitude of the move.
When a stock move as aggressively as Tesla has moved with a $.12 EPS announcement it points to other factors moving the price other than business fundamentals. Yes, its is wonderful Tesla posted its first ever profit and did it ahead of estimates but did anything other than hope move the price?
With a short interest of 23.85%, and volume nearly double the average of 11 million shares, it seems like the traders have decided that pricing is headed down. As of this writing shares are down to $81.61 representing a 7% decline in daily pricing. One interesting dynamic of Tesla is that institutions hold 70% of the shares. This level of institutional ownership can have two effects, one positive and one negative. As long as Tesla performs to meet investor expectations high institutional ownership acts as a stabilizer. The risk is that when one of them decides to sell it has a magnified impact and others may follow, believing correctly or not, that one of their peers knows something that they don't.
Since Tesla is barley profitable is it a place to invest? What do the institutional investors see in Tesla that others do not? I have toured the manufacturing facility and main showroom. It is impressive. Tesla represents a departure from every other automotive alternative in that they are focused exclusively on electric power. No comprise has been made in the design or quality of the Model S which compares favorably with the benchmark Mercedes Benz S class sedans. In addition to the manufacture and sales of cars they also have a robust design and engineering studio reminiscent of the Porsche Design Group. The consumer market will tell us over the next few years if battery powered cars are the path to the future, but in the mean time Tesla has successfully carved out a luxury niche and is supporting the brand with aggressive warranty and guarantee programs. With retail pricing ranging from $62,000 to $90,000 Tesla is targeted squarely at the luxury buyer.
Our thesis for Tesla is strait forward. If there is a market for electric cars Tesla is in the best position to capitalize on the transition from fossil fuel to battery and they support auto sales with technology licensing and engineering consulting while the market builds.
To enter the Tesla trade I will use Sell to Open Cash Secured Puts priced at the $70 strike for June 22nd 2013. This level is slightly below the 38% retracement of $73.3 and $4.11 over the next retracement at the 50% level of $65.89. If Tesla stock pricing falls to $70 or under by June 22nd I will own 100 shares. Today the Put pricing is trading for $4.00. The risk with this trading strategy is that Tesla share price will fall below $70 and I will buy shares at a higher than market price in June. The next quarter earnings announcement is scheduled for July 24th.
I think it's too risky to enter a position at current levels but I do want to take advantage of their swing to profitability and opportunity for the future sales. There are no competitive luxury brands in the market. If the market segments into the categories I foresee then Tesla will be the global leader in luxury battery powered cars.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.