Tesla (NASDAQ:TSLA) stock went up over 10% on May 2 and 3 as new regulatory filings showed that the company would be raising extra cash in U.S. markets through a combination of new shares and convertible debt. Tesla will sell 3.1 million shares and offer convertible notes worth $1.6 billion. This recent up move in Tesla stock following the news has left investors wondering what may be next for the car company.
This decision to raise capital is just the latest in a a series of worrisome moves that keep Tesla stock volatile.
So far, 2019 has definitely not been a good year for Tesla. Indeed, the stock price has been in a downtrend since early December 2018. Although many tech heavy weights and the broader market has rallied off their December lows, year-to-date, TSLA stock is down 25%.
Long-term investors would like to see Tesla recover soon and fast. The fact that the stock price went up following the news may mean that at least some shareholders are not too concerned about the dilution of their stock.
I’d personally take a more cautiously optimistic view and not necessarily regard the news as the reason to go long TSLA shares. Until we have more clarity on the overall fundamental story of the company, including how the cash to be raised will be utilized, I am not expecting a meaningful Q2 rally in the Tesla. Therefore I suggest that investors stay on the sidelines.
Here’s why.
Dwindling Cash and Tesla Stock
On March 1, Tesla paid out $920 million when its convertible senior notes expired at an equity-conversion price of $359.87 per share. This payment heightened the anxiety over the group’s decreasing cash reserves.
March and April saw Tesla stock come under pressure, as many fund managers discussed their concerns. As questions multiplied about the developments in the company, the stock price went from an intraday-high of $320 on Feb. 28 to an intraday-low of $231.13 on April 26.
Q1 2019 also saw more of Twitter rants by CEO Elon Musk as the public relations noise surrounding Tesla took over the story of the company’s fundamentals over the past year. Many analysts now highlight that Musk’s latest feud with the U.S. regulators at the SEC is not a laughing matter and that it may end up causing a serious headache for the company.
CNBC’s Jim Cramer would like to see the Tesla Board remove Musk as CEO. In case of a leadership change, investors may end up throwing in the towel in frustration until the company works through its top management issues.
Then on April 24, the car maker reported Q1 2019 earnings results when it showed a quarterly loss of $2.90 per share as well as a revenue drop of 37%. The results revealed that demand for the Model S and X have fallen significantly as it blamed “seasonality,” i.e., Musk announced that fewer cars get sold in the winter. Needless to say Wall Street was not impressed.
The issue of cash is only one of the important questions regarding Tesla’s fundamental story. For example, going forward, Tesla may decide to change its offerings, including vehicle types or prices, on a whim. Then the stock price may take yet another hit due to potential uncertainty in sales numbers and expected earnings.
Short-Term Technical Analysis
Over the past year, TSLA has been a battleground between two camps: investors and traders. Investors have been wondering whether the company will be able to work through various production issues and margin and cash worries as it becomes a full-fledged car manufacturer.
One thing best describes Tesla stock’s daily moves in the markets: roller coaster. It is soaring one day and falling off the cliff the next. Its 52-week price range has been $231.13 — $387.46. Previously on April 2, 2018, Tesla had seen a 2018 low of $244.59.
After investors’ harsh response recently, Tesla stock has also suffered from a damaging technical picture. Both the short-term and the long-term technical charts look weak, pointing to the possibility for more downside in weeks to come.
However, Tesla has longer-term support in the low to mid-$200’s. That is partly why I believe the stock has gone up in recent days, as part of a relief rally .
Therefore in May and possibly in June, I’d expect Tesla to stay within a range, possible between $230-$260. Then, possibly following some important fundamental news, I’d expect this range to be broken.
Although the next upcoming big move could be in either direction, if I had to choose between an up or a down move, I’d possibly say the move will be to the downside, first towards the $215 level and then the $200 level.
In case of an up move, if Tesla stock can move and stay over the $260 level, the next resistance point would be around the $290 level.
The Bottom Line on Tesla Stock
Given the volatility in the TSLA over the past year due not only to the unpredictable mood swings of Elon Musk but also to the question marks about Tesla’s fundamental story, I would urge long-term investors to exercise caution with Tesla shares.
I am of the camp that the recent price weakness is a reflection of investor sentiment and major fundamental worries.
If you already own Tesla stock, you might want to hold your position. However, within the parameters of your portfolio allocation and risk/return profile, you may consider placing a stop loss at about 5-6% below the current price point.
As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.
