Tesla Inc. (TSLA, Financial) is experiencing sideways movement, creating a narrowing price range after the Department of Justice and Securities and Exchange Commission initiated investigations against the company over the misappropriation of funds for Musk’s secret Glass House project.
Undoubtedly, Musk has a long history of influencing Tesla’s stock price due to his comments on social media and frequent interactions with regulators. However, savvy investors might consider this recurring phenomenon a good opportunity to accumulate shares.
The no-longer secret glass house project
The secret glass house, known as Project 42, is a project that Tesla has been working on near its facilities in Austin, Texas. This project involves the construction of a glass structure, which was planned to include living spaces such as bedrooms, bathrooms and a kitchen. The design concepts for this structure have been described as a "twisted hexagon" or a glass cube similar to Apple's (AAPL, Financial) 5th Avenue store.
What makes Project 42 notable is that it has been investigated by two government agencies: the U.S. Attorney's Office for the Southern District of New York and the SEC. The SEC is investigating whether Tesla used company funds for the project, while the Attorney's Office is looking into whether CEO Elon Musk violated any laws by using company resources for personal benefit.
Implications of the federal probes
The ongoing federal probes into the potential misuse of company resources and battery range claims could have significant implications for its valuation and stock price. If these investigations reveal evidence of wrongdoing or misrepresentation by Tesla, it may erode investor confidence and lead to negative sentiment surrounding the company.
Specifically, the probe into constructing a large glass house for Musk's personal use could raise concerns about corporate governance and the allocation of company funds. Any findings of financial impropriety could lead to regulatory fines or legal penalties, impacting Tesla's finances and potentially reducing its valuation in the short run.
Impact on reputation
Moreover, investigating battery range claims may affect Tesla's reputation for product quality and transparency. If it is proven the company deliberately misrepresented the range of its electric cars, it could lead to customer dissatisfaction and potential legal actions, which may harm sales and brand trust.
Source: tradingview.com
Accelerated revenue, autonomous driving milestones and a bright future
Tesla's automotive and services revenue is aggressively increasing, supported mainly by the strong trend in the global electric vehicle market and China's strong participation in EV sales. At the bottom line, the company's operational efficiency brought significant year-over-year growth in non-GAAP earnings per share and free cash flow of 20% and 62%, respectively, demonstrating a strong result from operations and a liquidity position that breeds further internal strength to expand.
Beyond top- and bottom-line outperformance, other fundamentals were in play during the quarter. Tesla set a target of delivering 1.8 million vehicles in the current year. However, it anticipates a slight decrease in production during the third quarter due to factory upgrades (summer shutdowns). These production and delivery numbers are critical indicators of the company's value growth, and it has already reached over 50% of the target during the first half of the year. With over 300 million miles driven using full self-driving beta, Tesla has significantly solidified its autonomous driving capabilities.
Additionally, Tesla's Dojo training computer is designed to reduce the cost of neural net training, a critical component for autonomous driving. The company expects to achieve an in-house neural net training capability of 100 exaflops by the end of the following year. The development of this technology can affect its cost structure and competitiveness and support a leap forward in market valuation.
Source: digitalassets.tesla
Also, Tesla is preparing to launch the Cybertruck, as well as a more affordable $25,000 EV. The Cybertruck is highly anticipated in the company's targeted market, and an obvious acceleration in revenue and market share in the highly competitive pickup truck segment (against legacy players like Ford (F, Financial) and competition from Chinese EV makers) will benefit the company and stock considerably over the long term.
Focus on battery production and energy storage
Further, Tesla's focus on battery production includes the 4680 cells produced in Texas. The company achieved an 80% increase in cell production in the second quarter and reduced cell cost of goods sold by 25%. Further developments in battery technology, such as silicon integration and in-house cathode production, can impact Tesla's battery cost and energy density. On the other hand, its energy storage products, including Megapack, are showing strong demand globally. The company is also growing its auto bidder contracts in wholesale markets. These products may boost Tesla's energy generation and storage revenue with a definitive margin.
The Texas factor
Fundamentally, the Texas factor is favorable for Tesla as the company scored a significant win with the approval of a plan that mandates its technology in EV charging stations for federal funding eligibility. Texas is a major beneficiary of the $5 billion U.S. highway electrification program, which could boost the company's charging infrastructure and potentially increase its market share.
Source: counterpointresearch.com
Technical view: A strong entry point
All the above developments in Tesla’s operational and business environment are shaping a strong entry point for long-term investors.
In the monthly time frame, the stock price has created a head and shoulders pattern with a neckline near $101 with relative strength index confirmation. Breaking the neckline is fundamentally less likely, as it may require a mega loss for Tesla in qualitative or quantitative measures. So, the neckline is becoming a critical support in the long term. Here, at the weekly timeframe, the stock price has changed polarity to $211 with a solid uptrend line.
Now, putting the factors one by one will make the picture clear. The recent SEC and DOJ probe may create temporary downside pressure on the stock, bringing the price into an ideal buying range of $211 to $155. However, operational efficiency, profitability and other fundamentals (product deliveries, charging network and technology adoption by the government and other key EV players) may bring the price above $300 (shoulders) in the coming months.
Overall, investors can take advantage of further dips (below $211, with RSI near 30) in the stock price, as beyond $300, the stock may create new highs over the long-term bullish trajectory.
Source: tradingview.com
Takeaway
In conclusion, amid regulatory scrutiny, Tesla stands firm with unshakable financial fortitude and technological prowess. Despite the investigations casting shadows, the company's soaring revenue in automotive and services, bolstered by global EV demand and efficient operations, showcases its resilience.
Tesla's upcoming game-changing products promise a bright future, while advancements in autonomous driving and battery technology fuel growth prospects. In Texas, where Tesla secured a significant win, the road ahead is paved with potential as the state embraces the company's technology for electric vehicle charging stations. Finally, the stock's technical analysis reveals promising entry points for long-term investors.
