Don’t Count On The Usual Tesla Bounce This Time

I have written occasionally here about Tesla (TSLA). While the relationship to the energy market and sector is a tenuous one, it is a fascinating stock that has produced a lot of trading opportunities over the last couple of years. What has made it so is that it has moved in a somewhat predictable manner, but the movement has been based on factors other than the fundamentals or prospects of the company. Based on the news this week though, the party may be coming to an end.

TSLA has been volatile for a while. That is the result of sentiment swinging between two extremes. At times the market has focused on the enormous potential of a company with an appealing mission and vison and a great product line, while at others the reality of earnings, or rather the lack of them, has taken precedence. Each time that has happened though, the company's CEO Elon Musk has released some information or made a comment that reassured the bulls and caused the stock to climb back.

As you are probably aware, TSLA has taken a major hit after it became known that the SEC is suing Musk and requesting that he be barred from being an officer of the company. That would be a blow to any company, but to Tesla, where many shareholders are more "true believers" than rational investors, it could trigger major losses.

(Click to enlarge)

There are signs this morning that the stock is bouncing back to some extent. It has gained a few dollars since opening around $270, roughly ten percent below yesterday's close, but don't be fooled. That is not surprising given the extent of the drop, but a significant recovery looks very unlikely unless maybe the SEC loses their case, and everybody accepts that it was all a big mistake.

That also seems unlikely, but even if it does come about it probably won't save the stock. The tweet from Musk that precipitated the action, saying that he was considering taking the company private at a price of $420, and that he had funding secured for that deal, has since been shown to be an exaggeration at best. Supporters are claiming that his actions were not intended to defraud, but whether that is true or not it will call into question everything he says about Tesla going forward. For a stock so often supported by one man's utterances, that is a big deal.

That leaves a vacuum on the bull side of the argument, so focus will inevitably shift to the hard data. We also learned this week that Tesla have hit their Q3 production targets with a couple of days to spare, and that sales numbers are good. But that still may not be enough to shift sentiment among the number watchers. Sales growth has been achieved with the help of some short-term incentives such as offering free charging in certain circumstances that can be viewed as simply pulling sales forward while negatively impacting future cash flow, and increased production when every vehicle is produced at a loss is not necessarily a win either.

Let's not get overly dramatic here. Musk's problems don't mean that Tesla is doomed. They still make great cars that are in line with what most see as the future of the industry and are still growing at a remarkable pace for a somewhat moribund industry. If viewed as a start-up there is still an optimistic case to be made in the long term, but that doesn't mean the stock is a buy down here. What we are likely to see over the next few weeks and months is further declines as valuations adjust to more realistic levels. Absent the predictable support from a Musk tweet or two, selling now, whether to cut an existing position or establish a new short one looks like the smart move.