Tesla Inc (Nasdaq: TSLA) stock gained more than 25 percent last week after the company reported a surprisingly profitable third quarter. But while Tesla investors cheered last quarter’s earnings beat, others are already looking ahead to Tesla’s fourth quarter. Tesla will need to demonstrate it can be sustainably and consistently profitable for TSLA stock to break out to new highs. In the days since Tesla’s earnings beat, Tesla bulls on Wall Street have weighed in on why Tesla could keep the ball rolling in the fourth quarter as well. Here are seven reasons Tesla could have a huge fourth quarter.
Tesla has positive margins.
Operating margin of 6.1 percent in the third quarter came in ahead of expectations, and Morgan Stanley predicts operating margins will remain above 5 percent in the fourth quarter. Model 3 gross margin of greater than 20 percent is also a positive sign for Tesla, especially after some analysts had speculated the Model 3 may never be profitable. While Tesla said it expects average sales price declines and mix shift to lower-priced models will weigh on margins, the company has a chance to prove in the fourth quarter that it can offset those declines by increasing efficiency.
No capital is needed.
Tesla again said it does not need additional capital and plans to use its positive cash flow to pay down debt due in the first half of 2019. If the company is able to avoid a capital raise in the fourth quarter, it would be a positive sign for investors that Tesla’s balance sheet isn’t in as dire a position as some analysts have speculated. Tesla’s ballooning debt has been a red flag for some investors who perceive it as too much of a risk, but that could change if Tesla proves it doesn’t need outside capital.
Pressure grows on short sellers.
According to S3 Analytics, Tesla has the second-largest outstanding short position of any U.S. stock. There are currently about $8.7 billion worth of Tesla shares held short, and the strong performance in the third quarter puts even more pressure on those short sellers to change their minds about the long-term trajectory for TSLA stock. Buying volume from short covering can easily create a snowball effect, driving TSLA stock higher and triggering even more short covering. Even if only a relatively small portion of short sellers abandon their positions, it could be…
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