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Volatility

Tesla – a momentum juggernaut with AI qualities

Chris Weston
Head of Research
Jun 14, 2023
We’ve just seen Tesla push higher for a 13th straight day and signs are it could rally for a 14th.

This is obviously an incredible run of form, especially as there simply haven’t been any positive earnings revisions – however, earning aside, investors have seen a 70% return since May (110% YTD), and the stock is hot, but is it too hot? 

Preview

Fundamentally, we’ve seen positive tailwinds from the news that GM and Ford are moving their EVs to utilise Tesla’s Supercharger, as well as tax breaks for owners of the Model 3. 

Tesla is seen foremost as an AI business

Arguably, the key fundamental reason is the market treating Tesla as an AI business, rather than a high-tech EV/auto business. Importantly, Tesla is not the only auto business evolving like this and buying chips from Nvidia, but they have first movers’ advantage and traders like the liquidity and ease at which they can trade the flow – either through direct equity or through optionality. 

Recent intel shows Tesla is buying Nvidia chips for their data centres, and as they strive to improve the safety and reliability of their autonomous cars, Nvidia’s chips help train their models and increase computing processing capabilities.

There has been investor focus on the demand for Nvidia’s chips that are central to the evolution that is playing out in ‘Software-Defined Vehicles’ – Tesla first pioneered this scene in 2012, but now Nvidia is helping to take this forward. This article explains it well (https://www2.deloitte.com/cn/en/pages/consumer-business/articles/software-defined-cars-industrial-revolution-on-the-arrow.html) but the idea of having a chip in a centralised computer that can be upgraded – just as a phone can, will appeal to many. In theory, it will only increase the vehicle’s performance and offer the user greater comforts without expensive purchases and trips to the garage. 

It seems the market is being educated on this now. 

Momentum is a clear driving force

Aside from the AI tailwinds, there is an out-and-out momentum play here. Traders want to buy what is strong and then ultimately sell at higher levels. The options crowd buy upside calls (slightly out-of-the-money) and as the price moves higher options dealers (who sold the calls) must hedge their exposure – they do that by buying Tesla’s stock and this just perpetuates the move higher. There is also limited supply, with few looking to sell.

I see some technicians screaming that Tesla has an RSI of 88, suggesting an imminent collapse. To me, it suggests the risk/reward trade-off is certainly turning and putting new money to work at these levels carries a higher risk. One can buy and hope it kicks further but be quick to cut any loss.

Shorting has hurt and many will want higher conviction in the price action to reload. Of course, at some stage, a fraction of the fast-money players will bank some profits, and that is where the opportunity is for the short sellers, especially the day traders - if the algo’s sense the sellers are finally out there then it may see a more protracted sell-off. 

Personally, I would stay with the momentum and look to buy weakness – the market still has more to explore on the AI front.  

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