If you are a regular reader of my offerings, you will be aware that I have been bearish on Tesla (TSLA) for quite a while. On March 1st, I wrote that the staffing cuts and other cost-cutting moves there could be a good sign in the long-term, but would prove problematic in the short-term, making the stock a sell. Then, three weeks ago, when the stock was jumping on news of a massive capital raise, I sounded a note of caution again. The stock is now 35% lower than when I made that initial call and, from a trading perspective at least, it is time to at least cut, if not reverse, short positions.
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The fundamental problems that I highlighted in those two pieces, most notably the company’s inability to consistently turn a profit, haven’t changed, but that isn’t the point. What has changed is that everyone is now jumping ship, even those that remained bullish for a while.
This week, calls from a couple of those disappointed bulls made the headlines. The first came from Morgan Stanley whose analyst “worst-case scenario” saw TSLA dropping to $10. Then came Citi, whose $36 bear case would have been shocking were it not for what came before. Those are certainly sensational numbers, but that is the problem.
Some may think that the inclusion of those numbers in the reports are an example of “hell hath no fury…” or are cynical attempts to garner publicity. I guess there could be some truth to that, but the reports themselves are far less sensational than the headlines they generated.
The $10 “call” from Morgan Stanley was no such thing. It was the logical extension of a worst-case scenario, but only one of the possibilities laid out. There was also a “best-case”, which saw TSLA hitting $391, but that received almost no attention. I guess “TSLA to climb gradually back to its previous levels” is just not as sexy a headline as “TSLA to collapse to $10!”
Citi’s full report was even less well represented by the headlines. Their analyst did indeed say that there was a 40% chance that TSLA could hit $36, but he also said that there was a 55% chance of a bounce back to $253 and even a 5% chance that it soars to $760. In other words, significant gains were considered one and a half times as likely as the big drop that the headlines would have you believe was coming. Yet, as those reports were released, TSLA lost value at an accelerating pace, pushing it below $200, levels not seen since the end of 2016.
The low then was around $178, and proximity to that level makes it likely that some support will be evident before long. That may turn out to be just a pause in the decline, but there is another thing that makes a significant bounce possible. As the stock has dropped over the last couple of months, short interest has increased and that makes a short squeeze that could exaggerate any bounce that did materialize.
Nothing much has changed about the fundamental outlook for TSLA. That is still in the balance. They still produce an amazing product and Elon Musk still has a bold vision of the future, but at some point, they need to make money, and the longer that point is delayed, the more likely it is that the stock will go lower.
On balance then, there looks to be limited profit potential to a short from here, and significant risk of a bounce back to around $250. The hysterical headlines this week have produced a gloomy perception of the stock, but the best time to buy a volatile stock is often when negativity is at its highest. Given that it is time to buy back shorts and even consider going long for a while.