You have to hand it to Tesla Inc (NASDAQ:TSLA) and CEO Elon Musk. Tesla, with the market cap now valued at nearly $50 billion, has yet to ever show even a dime of profit. TSLA stock, until just recently, seemed to be on autopilot with fresh new highs daily. All that ended after the last earnings report. With the faith now shaken, I look for TSLA to have difficulty heading appreciably higher over the next several months.
In a well thought out piece on TSLA from yesterday, InvestorPlace contributor Vince Martin weighs in on why he feels Tesla is a terrible short.
He definitely makes a compelling case. Certainly shorting a stock on valuation is many times a recipe for disaster, especially in this market where fundamentals have little to no meaning (for now). But as a trader, I always have a skeptical eye and listen to what the market is saying … and the market is saying that $50 billion is too much for TSLA.
Certainly the arguments and debate will continue to rage about future capital raises and their dilutive effect, the shenanigans of the Solar City merger, the vision of Elon Musk, whether the new Model 3 will be messiah or pariah, and a multitude of other topics. UBS analyst Colin Langan just ran a very insightful analysis on the Model 3 and questions whether it can ultimately generate a profit ever.
His research note also highlights the fact that currently TSLA stock trades at 6.7 times sales compared to 2.1 for the S&P 500. Important to mention that this comparative is with the S&P 500 at the highest price to sales ratio since the bubble years of the late 1990s. So it is safe to say that TSLA stock is not exactly cheap. Which may be why Langan has a $160 price target on Tesla.
As stated earlier, I listen to what the market is telling me, with the price action pointing to a double top in TSLA at the $325 level. The selloff post earnings disappointment and the subsequent failure for TSLA stock to break to new highs confirms that $325 may be a difficult area for Tesla stock to pierce in the coming months.
Click to Enlarge The advantage to using option strategies versus stock is the ability to structure defined risk trades with a decent cushion to safeguard against being somewhat wrong. A guardedly bearish out-of-the-money call spread fits that scenario.
TSLA Stock Options
Sell TSLA June $330 calls and buy TSLA June $332.50 calls for 55 cents net credit
Maximum gain is $55 per spread with maximum risk of $195 per spread. Return on risk is 28.20%. The short $330 calls is structured above the $325 resistance level and provides a 6.4% upside cushion to the $310.22 closing price of TSLA stock.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at tbiggam@deltaderivatives.com.
