This summer has been a roller coaster ride for shareholders in Tesla (NASDAQ:TSLA). The announced 5-1 stock split sent prices skyrocketing only to drop back to reality days later. Now, with the price creeping back up around the magical $450 mark, many are wondering if TSLA stock has peaked given ever increasing competition. Time to be a seller of Tesla on any rally.
Positive potential with improvements to battery design and autonomous technology is enough for Musk to predict that Tesla will grow over the next five years. But there’s a significant problem with the business model. Tensions with China will put a damper on long term overseas growth for Tesla irrespective of future innovation.
Elon Musk’s Reliance on the People’s Republic
The phasing out of subsidies across the world is straining the overall business model. It is beyond dispute that Tesla turned China into a cornerstone of its operations. China is the world’s largest EV market and has a government that actively subsidizes the industry.
The Pacific giant now accounts for over 23% of revenue for Tesla. Musk has done a great deal of work to make inroads with the Chinese government and secure favorable deals, including approximately $1.6 billion in China bank financing.
The issue is that long-term access to the Chinese mainland may be outside of his control. China is phasing out its subsidies by 2022, which are incredibly important for the bottom line for TSLA. This is even more important given that sales in U.S and Europe dropped by more than 20%.
It will do this concurrently with numerous traditional car brands expanding their EV fleet, which could significantly reduce sales in China and the ever-important sales of tradeable EV credits (another factor in achieving profitability).
China-U.S. Tensions Can Affect TSLA Stock
Access to the Chinese market itself altogether will also likely be lost over time. Morgan Stanley analyst Adam Jonas pointed this out in his recent downgrade of Tesla stock. He noted it was unlikely that U.S. and Chinese autonomous vehicle makers will be allowed to operate in each country indefinitely. Jonas went so far as to argue that Tesla China sales may be non-existent beyond 2030.
The general hostility between China and the United States over national security concerns continues to grow. Tesla will be affected more than most companies. The president is forcing disinvestment from Chinese firms, and reports show that his administration may soon restrict Chinese tech giant Tencent. That’s troubling for Tesla when Tencent has a nearly $2 million stake in it and is considered an advisor to the company.
Defense leaders in the U.S. Congress are also acting on fears that Musk and Tesla’s connections to China may pose for the country. For example, Sen. Cory Gardner recently proposed amendments to the NASA Authorization Act that target NASA contractors like Elon Musk.
One congressional Republican aide told reporters, “What is there to stop them from going to Musk directly and saying, ‘We’ll call your line of credit early, unless you give us X, Y, or Z?’” It will likely be used as a soft ultimatum for Musk: either make Tesla move on from China or lose your contracts. This could be devastating for TSLA stock.
North American Pressures Continue for Tesla
Europe remains an enigma for Tesla. A growing EV market is buying less of its product. Tesla is going to try and overcome this issue with the addition of the Berlin factory. It is yet to be seen if European consumers will choose it over domestic competitors.
Similar concerns rest in America. Tesla will try and compete by building electric pickups and expanding to Texas, but without the help of subsidies and tradeable EV credits. This means the company will eventually need to stand on making money from car production, which has proven to be unattainable so far.
Competitors have a substantial opportunity to surpass Tesla in the market. This is especially true given the continued deterioration of market advantages. Remember, Tesla still has ongoing quality issues. Plus prices aren’t low enough to dissuade competitors from entering the market.
TSLA Stock Technical Take
Source: The thinkorswim® platform from TD Ameritrade
The technicals point to a tired TSLA stock. There is major overhead resistance at $460. MACD just generated a fresh sell signal. Momentum has turned negative. A pullback to the $350 area seems the most likely course for Tesla stock.
Earnings are due Oct. 21. So shorting TSLA stock now can be risky. Instead, a bear call spread positions to be a seller after earnings on a further rally higher. It is also a limited risk trade.
How to Trade Tesla Stock Now
Sell the TSLA November $450/$455 call spread for a $2 net credit.
Maximum gain is $2 per spread with maximum risk of $3 per spread. Return on risk is 66%.
On the date of publication, Tim Biggam did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
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