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Spoiling Tesla’s Rally Could Come Down to Upcoming Catalysts

Spoiling Tesla’s Rally Could Come Down to Upcoming Catalysts

(Bloomberg) -- If the incredible rally in Tesla Inc. shares this year is making you dizzy, hold on to your chair.

Tesla has a slew of catalysts coming up in the next few months that could give investors a reason to pause, or propel the stock even higher. It all depends on how the company does in its tests ahead.

Tesla shares surged as much as 24% Tuesday before a sudden plunge in the last few minutes of trading shaved more than $100 from the stock price in just 6 minutes. The gain stabilized at 14% as the market closed, bringing Tesla’s advance this year to 112%, a rally that’s left analysts and investors scratching their heads about what is behind this latest acceleration.

Spoiling Tesla’s Rally Could Come Down to Upcoming Catalysts

The gap between the valuation of Tesla and other traditional carmakers “suggests investors are increasingly viewing Tesla as a tech company,” Loup Ventures’ Gene Munster wrote in a note. Morgan Stanley analyst Adam Jonas, on the other hand, wondered if Tesla’s parabolic surge was heralding the end of traditional cars with internal combustion engines.

Whatever the reasons behind the rally, there is no denying that Tesla has had a series of positive developments over the past few months, some major and some incremental. They include: two better-than-expected quarterly reports; opening a plant in China; and its Gigafactory operations turning profitable ahead of schedule. Here’s what else the company has in the pipeline.

Model Y Launch

The Model Y crossover, which Chief Executive Officer Elon Musk expects to become Tesla’s top seller, is expected to be launched sometime this quarter, ahead of expectations. During its earnings report last week, Tesla said it has started ramping up production and expected deliveries to begin by the end of March.

The vehicle, which is now expected to have a range of 315 miles -- compared with Tesla’s previous estimate of 280 miles -- is substantially ahead of competing electric cars from Audi or Porsche.

And while this may spark another rally in the stock, it is not without pitfalls.

According to New Street Research analyst Pierre Ferragu, who downgraded the stock earlier today after it blew past his price target of $800, the Model Y launch has the potential to disrupt the momentum of the Model 3 and slow down its pace of sales growth.

Battery Day

As Tesla’s edge over competitors in battery technology gets more attention, Musk plans to showcase the company’s prowess in the field by hosting a “battery day” for investors, likely in April.

Tesla is expected to talk about its acquisition of battery-technology company Maxwell Technologies Inc., which some say could be the cornerstone of the company’s overall battery strategy.

“Given CEO Elon Musk hinting the Maxwell acquisition is core to its next-gen battery technology roadmap, we anticipate the company is working aggressively to improve battery density in order to drive pack cost and vehicle weight lower,” said Oppenheimer’s Colin Rusch. The analyst said Tesla has a sustainable lead in battery technology and powertrain design over other carmakers.

When Tesla first announced the plan to buy Maxwell last February, Piper Jaffray analyst Alexander Potter said that the deal would give Musk an edge over competitors.

Read more: Tesla’s Maxwell Deal May Spell Trouble for Rivals, Analysts Say

S&P Inclusion

Despite a market value that now exceeds $150 billion and strong brand recognition, Tesla is still not a part of the coveted S&P 500 Index, since inclusion to the gauge requires companies to have at least four consecutive quarters of profit.

By that measure, it would still take Tesla at least six more months to become a member of the group, provided it continues to post profits in the first and second quarter this year.

China Production Ramp

Tesla’s Shanghai factory has already started deliveries of locally built sedans, and production will be ramping up fast, as demand is expected to be strong. The “China opportunity” could be worth at least $100 per share, and up to $300 in a bull-case scenario, Wedbush analyst Dan Ives wrote in a note on Jan. 22.

“The China/Giga 3 growth story has gone from a pipe dream to a real fundamental driver for Musk & Co. with potential now to hit 150k units in the first year out of the gates,” Ives wrote Tuesday.

Potential Bond Upgrade

The company’s bonds may be ripe for an upgrade, as Tesla has racked up cash by recording three straight quarters of positive free cash flow.

S&P Global Ratings, which rates Tesla B-, said in November that it may upgrade if Tesla’s free cash flow is at least around break-even, and cash is at a minimum $2.5 billion. The company has about $6.27 billion of cash and equivalents, according to data compiled by Bloomberg.

--With assistance from Dana Hull.

To contact the reporter on this story: Esha Dey in New York at edey@bloomberg.net

To contact the editors responsible for this story: Brad Olesen at bolesen3@bloomberg.net, Steven Fromm, Jeremy R. Cooke

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