Shares of Tesla (NASDAQ: TSLA) continue to confound bears . Tesla stock is one of the few stocks higher in 2020, a dismal year so far by any measure for most stocks.
Questions about production issues, safety concerns and even product quality that have plagued Tesla since its founding have been put aside, at least for now. Tesla stock has weathered the current market storm admirably after the company finally achieved 2019 delivery goals, suggesting a possible path to a semblance of profitability. Unfortunately, the path Tesla laid out for itself relies excessively on China.
China is vital to Tesla not only for production reasons, but also consumption. While Tesla has relied on subsidies to get them into new markets, its $7,500 a year U.S. tax phased out to zero at the start of the year.
Given that sales of electric vehicles in Denmark decreased by more than 60% when that country phased out its subsidies, CEO Elon Musk saw the writing on the wall, and doubled down on China, a country still offering such incentives. He did so just days after the President of the United States cautioned against doing so for national security reasons.
Unfortunately for Tesla, coronavirus has brought the Chinese economy to a near standstill from both production and consumption perspectives. Tesla stock initially followed the rest of the market, tumbling dramatically from $917 to a low of $362. Perhaps because of this drop, Musk fought to keep global factories open during the stay at home orders, but ultimately succumbed to pressure from public health officials.
Before the crash, China may have seen over 70% growth in the globe’s EV market, but even then, there were signs of roadblocks to market viability. With the emergence of Chinese competitors, the long-term viability of American companies has always been put severely in doubt. The recent turmoil and international trade tensions will only add to these difficulties for foreign companies.
Even worse, China is already contemplating cutting the electric vehicle subsidies it just extended — a move that would spell significant immediate trouble for Tesla stock.
All of this occurs while oil markets continue to spiral. The significant decline in gasoline prices also spells bad news for electric vehicle makers across the board.
Short-term technicals are also flashing red. MACD is back at extremes that have previously signaled a top for TSLA. The 9 day RSI is now overbought again, with a reading north of 70. Bollinger Percent B is firmly back above 1. And Tesla stock is trading at a large premium to the 20 day moving average, another telltale sign of over-exuberance.
Source: The thinkorswim® platform from TD Ameritrade
There’s inherent risk when investing in extremely subsidy reliant companies such as Musk Inc., which has received over $5 billion to date across his many ventures. Historically, this degree of reliance on the public sector has not fared well for other similarly-profiled companies over the long-term. The many external factors that Tesla currently faces — including the uncertainty in China and the oil markets — help illustrate why.
The shutdown mixed with a company history of unprofitability mean Tesla could be closer to a death sentence than it has been in years. This should worry investors, as even when the market “recovers,” there may not be a strong market for EVs overall. While Musk wants to save the world, he may become preoccupied with saving his companies, and that’s not a visual that draws investment. The best position for investors is being short Tesla stock to postion for a pullback.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at timbiggam@gmail.com
