Why Tesla Stock Is Heating Up Again

What happened

About 10 days ago, I wrote about how Tesla (NASDAQ: TSLA) was cutting its electric vehicle (EV) prices. I argued that Tesla wasn’t doing so just because it wanted to boost demand for its vehicles, but rather to ensure that more people buying them would be able to claim the $7,500 federal tax credit for qualifying EVs.

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Nor was I the only one to notice this — a Wall Street Journal article published this weekend makes the same point.

And now, as of 1:20 p.m. ET Monday, Tesla stock is up another 7.5%.

So what

According to the IRS, tax rebates of $7,500 on new electric vehicle purchases only apply to electric cars priced under $55,000, and electric trucks and SUVs priced under $80,000. When Tesla cut its prices earlier this month, it ensured that at least half of its available Model 3 and Model Y models qualify for the tax break.

Therefore, in lowering prices, not only did Tesla undercut popular Ford Motor Company and General Motors EVs on sticker price, it actually made the decision to buy a Tesla instead of an electric Ford or GM car much easier for consumers by sweetening the deal with federal cash.

Granted, Tesla’s rivals may now decide to cut their prices to put more of their EVs under the ceiling to claim the tax credit as well. But because those companies are currently earning less (or no) gross profit on their EVs (versus Tesla’s 27% gross profit margin), they’re going to be hard-pressed to win a price war against Tesla.

Now what

In just a couple of days, Tesla is due to report its fourth-quarter results. Analysts forecast a relatively modest profit of $1.13 per share, which would work out to only 33% earnings growth on a 36% bump in sales (assuming revenue hits analysts’ $24.2 billion consensus target).

The news could even be worse given that Tesla just admitted it missed its forecast for Q4 deliveries. Potentially, investors could see Tesla whiff on both the top and bottom lines. And yet, even if Tesla does miss on earnings when it reports on Wednesday, it could offer up a strong forecast for Q1 sales and earnings based on customer response to its new price cuts, and still get a positive response from investors.

The bad news? Tesla stock no longer trades at an attractive price/earnings-to-growth (PEG) ratio of less than 1. In fact, it trades now at 40 times earnings, and with a long-term growth rate estimated at just 29%, Tesla’s PEG ratio has shot up by more than 40% over the past three weeks. In short, the stock no longer looks objectively cheap. At this point, your best bet if you want to buy Tesla stock at an attractive price in the near future rests on a two-part scenario. First, you’d need a “bad” quarterly report on Wednesday, and second, you’d need investors to overreact to that report and bid the stock down on the news.

Could those things happen? We’ll find out Wednesday.