Tesla (NASDAQ:TSLA) has had a monster rally post-earnings after finally showing a profit. TSLA posted a positive quarter, although revenues actually missed slightly. This was just the fifth time in the company’s history that Tesla made money.
That news caused the share price of Tesla to spike over 30 percent, $254 to $340 in just three days. Tesla stock finally stalled out around $335 a share. In my opinion, it won’t stay there for long. It’s time for Tesla stock to put on the brakes.
It’s interesting to note that a year ago Tesla earnings came in at $2.90 per share on $6.82 billion in revenue. This year both earnings and revenues were substantially lower, yet the stock ripped higher. The combination of lower earnings and a higher stock price means TSLA stock valuations are getting back to historic extremes. Remember that the quality of TSLA earnings is circumspect at best.
Legal woes continue to swirl for Tesla. The company did manage to reach a settlement with Walmart over their pending lawsuit. The retail giant had sued Tesla after numerous rooftop solar panels caught fire. This caused substantial damage to Walmart’s store properties and to SolarCity’s reputation. Tesla CEO Elon Musk may have managed to avert one litigation crisis by settling. Another potentially devastating lawsuit is already brewing, however.
Currently, Tesla is embroiled in a lawsuit over the 2016 acquisition of SolarCity. The plaintiffs in the lawsuit allege that Musk and the Tesla board knowingly misled investors and breached their fiduciary responsibilities. They claim the Tesla CEO purposely oversold the financial viability of SolarCity to convince Tesla shareholders to acquire the company.
The acquisition benefitted Musk and SolarCity while saddling Tesla with billions of dollars of SolarCity debt. These revelations should raise massive questions about the business practices, company culture and ethics. Potential and current investors would be foolish to ignore them.
Tesla’s prospects in the lawsuit only continue to decline as more details emerge. In 2016, Musk served as the Chairman and largest shareholder of SolarCity. A year later, the solar panel company would be fined $30 million for allegedly lying to the federal government in order to obtain federal subsidies. Musk, it would seem, has a prior history of misleading others to serve his company’s interests.
Even SpaceX, another Musk-run entity, isn’t exempt from this trend. He previously misrepresented the aerospace company’s cash flow to investors. He did it by including customer prepay costs while omitting non-core research and development expenditures. This made the negative earnings for SpaceX for the period appear positive. Earnings trickery can last for only so long.
TSLA Stock Chart
Tesla stock looks decidedly overbought from a technical perspective. 14-day RSI reached the highest level of the year with a reading over 80. The last time Tesla was at similar overbought condition marked a significant intermediate term top in the stock. MACD was at an extreme at well before dropping. Bollinger Percent B blew past the 100 level. TSLA is trading at a massive premium to the 20-day moving average which has led to pullbacks in the past. There is major resistance at $340.
Clearly, the accusation of misconduct in the acquisition of SolarCity poses a serious threat to Tesla and the inflated share price. In addition to assuming SolarCity’s $3 billion in debt, Tesla must also spend its resources on extensive litigation expenses and a possible costly settlement. That should seriously hamper further profitability for a company that has struggled to consistently turn a profit.
Now that the rally has stalled, TSLA will likely continue to falter as a combination of bad press, litigation costs, and waning investor confidence take their toll. Extreme valuations and technicals will provide a serious headwind as well. As a result, Tesla—a company perpetually caught in legal trouble—remains a surefire short opportunity.
Tim Biggam may hold some of the aforementioned securities in one or more of his newsletters. Anyone interested in finding out more about Tim and his strategies can go to https://marketfy.com/item/options-and-volatility.
