A Technical Deep Dive into Tesla & Palantir

Mahmood Saboungi2023-11-14

In this post, we analyze Tesla and Palantir's stock performance amidst market volatility. We examine Tesla's fluctuating gains, focusing on its production, market demand, and profitability. For Palantir, we explore its growth in the AI sector, key contracts, and potential S&P 500 inclusion. The analysis includes insights from technical data to offer a balanced perspective for investors. This concise overview aims to provide a clear understanding of these companies' market positions without serving as specific financial advice.

Introduction

The last few years have brought significant volatility into the financial markets, with even large stocks like Meta behaving incomprehensibly like microcaps. In this article, we will look at the recent performance of Tesla and Palantir. The article will examine their recent price movements, the fundamental factors that may be influencing those price movements, and any relevant technical information that may assist investors. We would note that nothing in this article is intended to be interpreted as individual/tailored financial advice but as a general overview of performance and prediction of potential future price action.

Tesla

An investor favorite, Tesla has been on a heroic run since the end of 2020, boasting a 500% return for shareholders in this time. Although critics have regularly voiced their concerns regarding Tesla’s valuation, the stock has continued to demolish expectations as the fundamental business goes from strength to strength. However, despite its stellar performance over the last three years, Tesla has not been immune to the wild swings and chaotic volatility of the markets. 

As the graph above outlines, the last twelve months have been explosive for Tesla investors. At the start of the twelve-month period pictured above, Tesla’s share price plummeted over 50%. Since then, the stock has climbed an impressive 140% from the lows it saw in January. Having secured such a strong return despite the macroeconomic headwinds plaguing financial markets, many Tesla investors are rightly wondering whether to take profits. Let’s take a moment to look at why Tesla’s shares have climbed to such spectacular levels before analyzing whether they can sustain such a lofty valuation.

Production Numbers

The third quarter saw the EV leader produce over 430,000 vehicles and deliver approximately 435,000 during the quarter. These numbers were initially negatively received by the markets as it missed analyst expectations, sparking a decline in Tesla’s shares that has since recovered. 

Whilst the market was initially displeased with Tesla’s results, we believe investors quickly realized the production numbers are better than they appear to be given the circumstances. To begin, a planned factory shutdown was announced in a prior earnings call that contributed to a reduced production capacity. Secondly, a reduction in demand for vehicles is unsurprising given the current macroeconomic environment.

As you can see above, interest rates on new car loans have spiked over the last 12 months. Naturally, this has led to a reduced consumer appetite for new vehicles with many consumers choosing to delay vehicle upgrades as a result. When considering the increased cost coupled with the need to shut down a factory this quarter, we believe Tesla’s numbers were considerably stronger than they initially appeared. 

Further, it is worth noting that the EV leaders 2023 volume target of 1.8 million vehicles remained unchanged suggesting that Tesla is expecting stronger numbers for Q4 to compensate for missed targets in Q3.

Demand Decline

Tesla’s ability to hit production and delivery numbers will be critical to the stock’s short-term price moves. As a result, analysts are closely monitoring numbers in major markets like China. 

Regrettably, despite Tesla’s aggressive price reduction strategies, sales in the Chinese markets continue to decline as the price reductions prove to be less effective over time. Model 3 and Model Y deliveries in China fell 31% in July, while Chinese rival BYD Auto grew 4% month-over-month.

BYD remains one of Tesla’s key competitors in the Chinese market and has managed to maintain growing numbers for six consecutive months. This data suggests that the dip in demand for Tesla vehicles is not due to broader economic conditions within the Chinese market but an issue with Tesla’s offering as an EV manufacturer. If this trend continues, it may impact Tesla’s numbers for Q4 and early 2024. Were this to occur, we may be likely to see a meaningful pullback in Tesla’s share price over the coming quarters.

Margins

Regardless of its past performance, maverick CEO, or potential as a tech company, Tesla currently holds a 74 P/E ratio, making it a comparatively expensive stock to purchase. Further, it is currently trading barely 10% off its yearly highs which does not allow investors to purchase more of the stock at a discount.  

To justify this level of valuation, Tesla will need to continue to grow its earnings. However, with margins beginning to shrink, this may prove to be more difficult than bullish investors may believe. 

Lower gross margins have already had an impact on profit margins with Tesla's Q2 profit margin falling from 16% to 13%. Although this has not had a large impact for the moment, a continuing decline in margins could lead to a decline in Tesla’s valuation. 

As you might imagine, a continuing decline in margins would put the EV manufacturer on a path to have the same margins as legacy automakers like Ford. A situation like this would not allow Tesla to command a premium valuation over its competition as it currently does. As a result, investors will rightly be looking for Tesla to stabilize its margins soon.

Technical Analysis

According to the technical data provided by Trading View, Tesla stock retains a strong buy rating.

However, according to the trading signals provided by Blackhedge, the 6 Month and 1 Year charts for Tesla are showing bearish price reversals with Sell signals generated on October 19th and September 27th respectively. For swing traders, this means that prices are trending downward in the short term and entering into long positions in TSLA right now could be risky plays.

Blackhedge is an AI-powered companion tool that provides Buy and Sell signals for swing traders. Using predictive algorithms and machine learning models, these signals indicate when prices are trending up or down by calculating recent price and volume data and applying indicators such as MACD, RSI, Stochastic K, ATR, and others. Click here to download Blackhedge and start your 7-Day free trial.

These signals are not intended as any sort of investment advice or recommendation. They are simply for educational purposes only.

Palantir

The former Wall Street Bets darling has enjoyed a spectacular run over the summer months as AI-related stocks benefited from a boom in the industry, with Palantir being a significant beneficiary. 

As the chart above illustrates, the stock is up over 110% since May with a slight dip in recent months as the momentum in AI stocks begins to fade. Let’s look at the main factors pushing Palantir’s shares higher and analyze whether this rally is capable of continuing.

Earnings & Contracts

Despite its recent rally, Palantir stock declined after publishing its second-quarter results. Although profit and sales numbers matched estimates, the management's responses during the earnings call disappointed investors leading to a decline in the stock price. This was especially disappointing as the company also announced a $1 billion buyback for PLTR stock which was not as well-received as other buybacks usually are. 

However, the good news continues to keep flowing in for Palantir as military contracts to research AI and assist the United Kingdom’s National Health Service keep growing the company’s revenue. 

Indeed, Palantir recently announced a strategic partnership with PwC, a world-renowned professional services firm. The partnership will utilize Palantir’s AI capabilities with PwC’s industry contacts to help clients unlock the value within the data they hold. 

The partnership will see PwC leverage Palantir Foundry, the platform for integrating data, analytics, and operations, and Palantir’s Artificial Intelligence Platform (AIP) to help clients identify and action strategies for value creation and operational transformation.

Naturally, Palantir’s shareholder base is excited about the potential this partnership has to expand Palantir’s commercial business. As many investors are aware, a key criticism of the AI company is that their revenue is too reliant on government contracts. If this partnership proves fruitful, investors may see an increased rate of growth in Palantir’s commercial revenue. 

Whilst Palantir remains in the infant stages of profitability, it is contracts and partnerships like those mentioned above that have led to one of the largest factors getting investors excited about the prospect of investing in Palantir: S&P 500 inclusion.

S&P 500 Inclusion

Inclusion in the S&P 500 can increase the visibility and attractiveness of a company's shares to a broader range of investors, including institutional and index-tracking funds. 

When a company is added to the S&P 500 index, it often experiences a boost in demand for its stock as these funds purchase shares to match the index's composition. This heightened demand can lead to an increase in the stock's price and liquidity, potentially benefiting existing shareholders and the company itself.

To qualify for inclusion in the S&P 500, Palantir must meet specific criteria set by the Index Committee at S&P Dow Jones Indices. These criteria include factors such as market capitalization, liquidity, financial stability, sector representation, and profitability. Typically, a company is required to have consistently profitable earnings over the four most recent quarters.

At the time of writing (October 2023), Palantir has enjoyed two consecutive quarters of profitability with expectations that the company will meet eligibility criteria at the end of Q4 2023. If this were to occur, it could provide a strong boost in the company’s share price towards the end of the year.  However, we should note that inclusion into the S&P is no guarantee of sustained growth and that even if Palantir did enjoy a short-term rally as a result of the inclusion, there is no way of knowing how reliably Palantir will be able to hold that higher valuation.

Technical Analysis

According to the technical data provided by Trading View, Palantir stock enjoys a strong buy rating.

However, according to the trading signals provided by Blackhedge, the 6 Month and 1 Year charts for Palantir are showing bearish price reversals with Sell signals generated on October 20th and October 27th respectively. For swing traders, this means that prices are trending downward in the short term and entering into long positions in PLTR right now could be risky plays.

Blackhedge is an AI-powered companion tool that provides Buy and Sell signals for swing traders. Using predictive algorithms and machine learning models, these signals indicate when prices are trending up or down by calculating recent price and volume data and applying indicators such as MACD, RSI, Stochastic K, ATR, and others. Click here to download Blackhedge and start your 7-Day free trial.

These signals are not intended as any sort of investment advice or recommendation. They are simply for educational purposes only.

Conclusion

Tesla and Palantir both represent strong opportunities for long-term investors. However, as is usually the case with growth companies, their short-term price action is difficult to predict and will likely be determined by the fundamental performance of the business over the company quarter(s). 

Thank you for reading.


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