Last night Tesla (NASDAQ:TSLA) reported earnings and the report was a disaster. Yet Tesla stock is barely down. Today we consider if this is an opportunity or a trap.
For a long while TSLA fans couldn’t get enough of any sliver of good news from the company. Whatever Tesla did, it came across as revolutionary. The uber fans were unstoppable all over social media and they defended Tesla’s — and CEO Elon Musk’s — honor vigorously.
Unfortunately, this is no longer the case. The TSLA haters are out in full force as the company cannot seem to make any right moves lately. Tesla stock came into the earnings down 20%.
Then, management missed on every target they set. They recently announced drastic changes in their store setup only to reverse them the next day. They release the so-called cheap version of the Model 3 only to then stop selling it.
So TSLA stock is not an easy one to hold. Investors not only have to contend with the business challenges but also with the side show that is Elon Musk.
He cannot get out of his own way. He is lucky to still be in his post, yet he keeps testing the patience of the legislators, This could have an ugly ending.
Tesla Is a Car Company
Investors in Tesla stock are the frustrated. It has a good story but a story can’t sustain it much longer. The fundamentals on Tesla are much tougher now than a few months ago.
Experts on Wall Street once said that Tesla was not a car company. In the eyes of investors it was a technology disruptor and an energy company. But now, there are only talks of car production metrics and hardly any mention of other venues. Recently Musk has started saying that Tesla will launch a fleet of autonomous vehicles and start a ride share business but frankly his timeline and scale sounds fake.
Now, for all intents and purposes, TSLA is a car company. The story went from a moonshot to how many Model 3’s they can produce in a quarter.
To that, Tesla announced that they grew the Model 3 deliveries by 3%. But the Model S and X are about half of that of the 24 month run rate.
From that perspective, Tesla stock it is astronomically expensive. It’s losing $5 per share where as General Motors (NYSE:GM) earns $5 per share. Moreover, GM and Ford (NYSE:F)’s price-to-sales ratios are .35 and .25 respectively. There’s just no comparison.
Tesla Earnings
Last night, Tesla reported earnings and it was a fail. And they were barely able to accomplish that as the report didn’t come out until over an hour after market close. This is seriously bad timing as management is trying to regain investor confidence.
In addition, the report card was terrible. They missed the already lowered forecast by a mile. Management reported a loss of $2.90 when they only expected a lost 69 cents. Revenues were $4.54 billion against an expected $5.19 billion. Yikes.
This is a cause for concern. It feels like the noose is tightening. Tesla stock is supposed to be a growth story yet they missed their sales by a massive amount.
Trading Tesla Stock
So this sounds all negative so far and you might expect me to recommend shorting the stock. But I don’t. A stock this emotional makes for a dangerous short.
For months, TSLA has had a string of exceptionally bad news. And yet in spite of yesterday’s earnings report Tesla stock is holding its levels. The sellers are exhausted from trying to push TSLA through the floor around $250.
This makes Tesla stock a trading vehicle and one that is not for the faint of heart. If you can stomach the risk then it is best to trade it for the short term or medium term. I don’t expect Tesla to be a viable thesis for the long term.
It’s unlikely TSLA can grow into its valuation anytime soon. It needs several miracles to happen in several areas for it to accomplish that. This is not the same as saying it’s a failing company, but owning the shares with conviction here requires a lot of faith. So it remains a trading vehicle an not investment thesis.
Luckily, the charts offer lines that can guide traders from here.
Since Tesla stock held its value in the face of terrible report card then I bet that the $250 per share level will hold for the weeks to come. If that’s the case, then it will provide the bulls with the platform they need to mount a rally. If they break through the trend line of lower highs then they can target $300 per share. But there will be resistance through $275. Then again at $296 per share.
Conversely, if Tesla falls below $245 per share it would open a trap door which would trigger a bearish pattern to retest $180 per share.
Emotions are high with Tesla stock so in order to be successful trading it, investors must be diligent and agnostic. It is important to trade the price action not the fundamentals.
Technically, Tesla stock has traded in a descending wedge since the start of the year. However it stopped making lower lows on the weekly chart thereby creating a tight wedge.
This gathers energy that has to resolve itself with either a sharp bounce or a big drop. The bounce would target $300 per share which has been contentious for years. The drop would correct Tesla stock down to sub $200 level.
It is best to wait for the breach of the edges before chasing. Otherwise the trade would be more guessing than trading.
It is also important to note that the stock market in general is at all-time highs which makes it a tough slog upwards from here. This is another challenge for TSLA because it will definitely need the help of the entire market as well. I find it hard to believe that Tesla stock could rally alone in a falling market.
Luckily the macroeconomic environment still favors the bulls. And the central banks are still on the side of the stock markets.
The Bottom Line on Tesla Stock
The Tesla story has definitely changed and onus is on Elon Musk to set back on track. In the mean time, traders should watch TSLA’s price action and trade for the medium and short term only.
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.
