It’s been a tough few months of trading for investors, but not many names have been worse than Tesla Inc (NASDAQ:TSLA). Investors have been willing to overlook Model 3 production concerns in hopes that management would sort out the issue. After all, Elon Musk & Co. always have, so why wouldn’t they now? But that hope seems to be fading, as Tesla stock continues to crash.
Shares may have ended last week with a slight jolt to $266, but they’re still down notably. TSLA stock has fallen 19% over the past five trading sessions and more than 26% over the last month. From its highs, Tesla stock is down almost 37%.
Ouch.
Tesla Stock Has Fallen Like This Before
It’s been a rough ride and unless the company can convince investors that things are looking better than they actually are, it’s going to be tough to get its stock to rebound.
So why then did we write a headline questioning whether a 93% rally is in the cards?
Simply because of the last time we saw this type of action, back in January and February of 2016. If TSLA were to post a similar rebound on a percent basis, it would take shares to almost $500. Back then there were all sorts of negative headlines hitting the wires: Analysts were cutting their targets and/or downgrading the stock as fears began to grow about Model X production and demand. Worries over low oil prices and competition were also at play.
Falling oil prices might not be in the cards right now, but many other concerns certainly are.
Trading Tesla Stock
On the chart below, we circled the height of 2016’s concerns in purple. It shows TSLA stock entering 2016 and essentially plummeting over the next six weeks. However, shares soon reversed higher and formed what we call a “V-bottom.” This occurs when a stock goes on a precipitous decline before quickly forming a bottom and violently rocketing higher.
Click to Enlarge
Can Tesla stock do it again?
For bulls, that’s the hope, while bears hope this fall is just the beginning. Once support gave out (orange line), it plunged Tesla stock into “no man’s land.” Unless $250 is indeed the low for TSLA shares — so far, today’s trading indicates that it’s not — could be heading to $200 to $210. That level (blue line) was channel resistance for several years before Tesla broke out over this level in 2017.
So how do we play it? Aggressive bulls can take a shot on Tesla stock and use the recent low as their stop-loss. If that’s their play, I would target a rebound back toward previous support (orange line).
Bears have a play too. They can sell Tesla stock short now that the recent low near $250 has given way. Below that and TSLA stock can easily continue falling.
Unfortunately, we’ll need to keep a pulse on the broader market too. Tesla stock has not fared well while the PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ) has been under pressure. Obviously leading that decline has been Facebook, Inc. (NASDAQ:FB). So while social media and electric cars may have little to do with each other in the real world, they have plenty of connections — at least right now — in the stock market.
The Bottom Line on TSLA Stock
While the company did churn out impressive operating cash flow (OCF) last quarter — a huge plus! — it’s struggling to increase production of its Model 3 sedan it’s also struggling to reduce its free-cash flow deficit. Because the company is carrying more than $11 billion in debt, it needs better FCF. Why? So Tesla can fund production of the Model 3 as well as take on other initiatives without worrying about its cash balance or worsening its debt situation.
Reports suggests Tesla still isn’t producing the 2,500 Model 3 units per week management was aiming for by the end of Q1. It would be an “incredible goal” should Tesla hit that mark, according to a leaked email.
The pressure is on as shorts pile into the name and Tesla’s bond prices have begun to erode. If the automaker can’t scale its production fast enough, it will need more cash and it will likely have to tap the equity market rather than the bond market. That would put even more pressure on Tesla stock.
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.
