Tesla Inc (NASDAQ:TSLA) is clobbering the markets so far this year, up more than 50% for the year-to-date. But TSLA stock is currently mired in a roughly 10% slump for the month of July, making it safe to at least call the latest action a pause.
But is Tesla’s monster run over and due for more declines, or is this just a breather before shares start sprinting again, fueled by Model 3 jubilee?
And you also might want to ask yourself: How patient are you?
The Trouble With Tesla
What’s tough about Tesla is its valuation — it doesn’t work. Tesla has no profits, nor are analysts projecting profits in the future, so any earnings-based valuations are right out the window. And while the company trades at a high 6-plus price-to-sales, that doesn’t seem to matter — TSLA stock hasn’t indicated that it trades with any tether to value.
If a General Electric Company (NYSE:GE) gets over its skis, investors can critique the valuation and wait for it to return to historical norms. But where’s the “norm” for Tesla?
Other metrics don’t work, either. Analysts love looking at Tesla’s market capitalization on a per-car basis, then comparing it to Ford Motor Company (NYSE:F) or General Motors Company (NYSE:GM). But while they’re all automakers, Ford and GM are wildly different companies than Tesla — even more so now that it has a solar business blended in. People also like to point out that Ford and General Motors are pushing out profits while Tesla keeps bleeding red ink … but on the flip side, have Ford or General Motors recently generated the kind of excitement and rapid growth clip that Tesla has?
It’s not apples to apples or even apples to oranges — it’s candy to bread, so it makes no sense to try.
This is why many fundamental investors really struggle with TSLA stock. And what we get instead is an emotionally driven stock crossing with old-school economics (supply and demand).
So Now What?
Even if you want to ignore the difficulties with valuing Tesla and just claim that it’s overvalued, I supposed you could also make arbitrary calls for deep 30%, 50% or 70% declines. It could happen, but those who believe it ignore just how long the likes of Netflix, Inc. (NASDAQ:NFLX) and Amazon.com, Inc. (NASDAQ:AMZN) have been able to maintain sky-high prices.
I’m personally of the belief that Tesla is probably worth less than today’s prices, and that a pullback of a smaller scale is likely in the cards … but as long as Model 3 news remains positive, shares have a good chance of staying level, if not climbing.
My advice? Although big-time investors like Jim Chanos and David Einhorn are betting against TSLA stock, perhaps you shouldn’t.
Why? Unless your pockets are as deep as a portfolio manager’s, you probably don’t have room to go short the kind of stock that can rise against reason for a year at a time — and in relatively calm waters, that’s a low-percentage shot anyway. If you’re insistent on going short, consider put options instead, and wait for the start of a snap before making a bear play.
The flip side is, you could wait for another pullback, then ride TSLA higher.
What to Do With TSLA Stock
Click to Enlarge Tesla has been enormously frustrating of late, sinking from above the $380 level down to its current price around $330, where it has idled for a couple weeks.
A worrying development is the 20-day moving average breaking under the 50-day MA — a formation that isn’t quite as strong as a death cross, but bearish nonetheless. And that 20-day MA is approaching as overhead resistance — not by shares rising, but the average declining.
Whether it’s TSLA stock moving up to test its 20-day (or better yet, its 50-day) or those averages coming down to meet it, should it be rebuffed by resistance, that’s when bearish traders should strike.
Should shares dip all the way down to the $280 level, that’s where I’d really look to start buying, though $310 could be a fruitful level as well.
Right now, Tesla stock is floating in no-man’s land. There’s no compelling technical setup at the moment, and valuation is a pointless argument, which means that the only other possible catalyst is the news.
Should Tesla remain quiet on that front for a couple weeks, it’ll be forced into a pressure cooker on Wednesday, Aug. 2, when it reports second-quarter earnings.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
