Tesla (NASDAQ:TSLA) made news last night and Wall Street is abuzz about it since then. I view it as yet another headline that caused a Thursday rally and a fade today. These don’t change the long-term outlook now and are opportunities to trade the stock.
Tesla is an emotional stock. There are those that absolutely love it and those who hate it with a passion. There are just as many “buy” recommendations as sells …
Extreme opinions are almost always wrong and somewhere in the middle lies the truth. It doesn’t help matters that CEO Elon Musk is the personality that he is. He is brilliant and spontaneous, and his words instigate high emotions.
Case in point is what happened last year with his famous statement about taking the company private and that he had secured funding for it.
Musk was lucky to get out of legal trouble with the SEC with a mere slap on the wrist. Nevertheless, the 2018 troubles sent TSLA stock into a pricing tempest. As a result, it had four round trip moves over 25%.
The edges are really what matter. They establish the limits of where bulls and bears are willing to push. It has bounced hard off the $250 floor of 2018. But there are interim levels and the closest are the recent bottoms at $289 and $280 per share. Today’s dip is the first high-profile move caused by Tesla specific headlines since the closure of the 2018 tweet-gate.
While equity markets have been on a rocket ship this year, TSLA has lagged behind. It still is lower than its December lows, and it is still mired in its test of the $300 psychological level … I’ve been lucky trading the stock from the bullish side. But I use options because I like to sell puts into fear when Tesla investors panic on days like today and that generates income without owning shares.
This is not to say that I believe in the value of it. But I do trust in the passion that its fans have for the stock. Fundamentally, Tesla is too expensive for a car company. It is but a sliver of the major automakers, yet its market cap is as big as General Motors (NYSE:GM) and almost twice the size of Ford (NYSE:F).
And therein lies at the debate …
Bulls argue that Tesla is not a car company even though most of Wall Street values it as one. The long-term bullish thesis is muddled, so it has many heads. This is what makes it hard to short. This is clearly a cult stock, so the fans are absolutely sure it won’t fail. There are those who even have a $4,000 price target on it.
Personally, I don’t like the stock for the long run because of the high hurdle to cross. It is priced for perfection, so I don’t risk long-term money on it. But this doesn’t mean I can’t trade it for the short term. For that, there are clear levels to provide guidance.
Yesterday’s surprise event caused a tizzy in the stock, which was a classic sell the news event. So just before the Thursday close, it ran up to near $320 per share. That marked the short-term high mark. If the bulls are able to break above it then they would target $340 to fill the gap above with interim resistance around $324.50. The breakout from this level won’t be like slicing through butter, though. On the way up, there would a stall at $320 because it is now the upside pivot point.
Conversely, when the actual announcement came out, the stock dipped to a low below $300 per share. That marks the immediate low mark for short-term trading. If the bears are able to break through it then they could target $289. But there is a substantial support level at $300.40 per share. This is not the pure psychological aspect but also an important green candle from Feb. 27.
To add to the drama, today Tesla is expected to make a payment for a bond coming due worth almost $920 million. Consensus is that they have enough cash to pay it but that it will also cause a tight cash position for the short term.
But there is the chance that once they make the payment then the stock could have a relief rally. This bond has been in the headlines for months. They missed the opportunity to convert into equity because the Tesla stock is below the trigger level for it.
After all is said and done, Tesla’s valuation is years away from being proven wrong or right. Clearly, the company has captured a huge audience and they have set the standard for electric vehicles. Now all the major auto makers chasing them with deep pockets. But just like Amazon (NASDAQ:AMZN) is always one step ahead of the competition, I hope that Elon Musk can be like Bezos and do the same for Tesla.
Tesla does have big plans going forward with the trucks and other battery ventures, but for now, it remains constricted due to capacity.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.
