Tesla is going after a major luxury car rival by going for the entry-level buyer.
In an interview with Britain’s Auto Express, Tesla CEO Elon Musk said the company is planning on a $35,000 electric car by 2017 with a 200-mile range with a battery made at the company’s future “Gigafactory.” The new model will be called the Model III and will challenge entry-level cars such as BMW’s 3-series (which retails for $32,750) and Audi’s A3 (at $29,900) and A4 ($33,800).
Will this help Tesla’s stock grow into its incredibly high valuation? David Seaburg, head of sales trading at Cowen and Company, believes so.
“This is a pretty unique opportunity for them,” Seaburg said. “They are going to be rolling this car out right around when the millennials are starting to really build families and build households.”
Using back-of-the envelope math, Seaburg believes Tesla may be fairly valued relative to Ford and General Motors given his projections for growth. He believes Tesla will have $25 billion in revenue by 2020.
“I don’t think from a price standpoint here, if you really look at, it’s trading at an outrageous price based on future growth,” Seaburg said. “But it is really priced… to perfection.”
While he likes the stock in the long-term, then, Seaburg says there’s no rush to buy right now.
Richard Ross, global technical strategist at Auerbach Grayson, agrees with Seaburg. “We talk about growing into its market cap, growing into its potential and a lot of that has to do with the broader market,” he said. “In a bull market, you buy yourself some time. You have the luxury to grow into it. But if the market gets a little shaky here, we are going to lose our patience with this highflying stock.”
Though Tesla shares have seen two declines of more than 30 percent each over the past nine months, Ross doesn’t believe the chart of the stock is particularly bearish.
“You have to be prepared for some real volatility in this stock,” said Ross, a “Talking Numbers” contributor. “But we continue to hold key support at our longer term moving averages – that’s your 200-day [moving average], and on the most recent pullback, we’ve even held the 50-day moving average, which is a pretty nice little bullish tailwind.”
Tesla’s 200-day moving average is currently around $189.51, while its 50-day moving average is at $212.79.
But it’s the longer-term chart of Tesla that leads Ross to warn against buying the stock at its current levels. After hitting a high of $265 in late February of this year, Tesla dropped to a low of $178 by early May. It then rebounded to as much as $244.49 in late June before heading back to its current price of $220.
“This is a version of the double top,” explained Ross. “It’s even more bearish because you cannot eclipse that old high, which is a warning sign of a potential reversal in trend. Yes the trend is still higher. But keep in mind we’re up almost 900 percent over the last 18 months.”
Ross sees the potential of Tesla breaking down toward its 50-week moving average near $185 per share.
“If you can’t stomach that kind of move, you can’t buy the stock right here,” Ross warns. “And on a break below that longer-term moving average, you’ve got to be gone.”
To see the full discussion on Tesla, with Seaburg on the fundamental and Ross on the technicals, watch the above video.