Shares of Tesla (NASDAQ: TSLA) have pulled back sharply after hitting the goal of producing 5,000 Model 3 cars per week in the second quarter. TSLA stock initially spiked on the production news, but then fell back when many analysts questioned the sustainability and quality of those production numbers. The recent tweets from CEO Elon Musk only added fuel to the sell off. Given the continued issues surrounding the company from both a production and financial stability standpoint (let alone the recent unhinged behavior of CEO Elon Musk), every rally should be sold in Tesla.
TSLA stock is driven by faith, not fundamentals. That faith is being questioned more and more as the cash burn rate continues to climb to alarming levels. A recent article from Bloomberg points out that Tesla burns through nearly $7,500 every minute. Free cash flow has been negative for six straight quarters.
With less than $3 billion remaining in cash, another dilutive capital raise appears likely.Given the recent downgrade of Tesla debt by Moody’s, any new raise will be decidedly more expensive.
The bombshell lastest bombshell news? Yesterday, the Wall Street Journal reported that Tesla is asking suppliers to return part of the money previously paid. This will only add more fuel to the capital raise fire.
One of the underpinnings for demand for Tesla cars is the tax credit received when buying an electric car. The first 200,000 buyers would receive a very rewarding $7,500 credit with subsequent buyers getting 50% less until it is phased out completely. Well, Tesla just passed the 200,000 milestone, so future demand will likely be crimped by the lowered tax credit, especially given that fellow competitors like Mercedes and BMW will be able to offer the higher tax credit to buyers. Needham downgraded TSLA stock to sell based on this very notion.
While Tesla did meet the self-imposed Model 3 production numbers, questions continue to plague the validity of the numbers. Analyst Brian Johnson of Barclay’s warned of brief production bursts that were not sustainable. In fact, Tesla put up tents to meet the short term production numbers. The real question is how long the charade can continue.
TSLA Stock and Earnings
TSLA stock just broke the widely followed 50 day moving average at $313.58 and looks likely to test critical support at the $300 level. Money flow remains anemic after spiking sharply following the last short covering rally. With no fundamentals to support the stock, a break of technical support could lead to a more meaningful downside move.
Earnings are due August 1 with expectations for roughly $4 billion in revenue and a loss of $3.61 for earnings. Over the past four quarters, Tesla has actually missed earnings expectations on three occasions with losses being even larger than expected. Another earnings shortfall may be enough to torpedo TSLA stock below $300.
So to position yourself be a seller of TSLA stock on strength, selling out of the money call credit spreads makes sense.
A TSLA Stock Trade Idea
Sell TSLA Aug $340 call and buy TSLA Aug $342.50 call for a 50 cents net credit.
Maximum gain on the trade is $50 per spread with maximum loss of $200 per spread. Return on risk is 25%. The short $340 strike price provides a 8% upside cushion to the $313.48 closing price of TSLA stock.
Tim may hold some of the aforementioned securities in one or more of his newsletters. Anyone interested in finding out more about Tim and his option-based strategies can go to https://marketfy.com/item/options-and-volatility.
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