The growing tension between electric car maker Tesla (NASDAQ:TSLA) and the Chinese government is becoming hard to ignore. Shares continue to struggle even as the overall market approaches all-time highs. Factor in the increased competition from the major automakers and the downside looks like the obvious path for an overvalued TSLA stock.
If things don’t change soon, the company’s 2020 momentum will completely evaporate in its key market, and there’s reason to believe it won’t rebound. In fact, fellow InvestorPlace analyst Faizan Farooque recently wrote about Tesla’s market struggles and outlined several reasons why a bearish outlook is overtaking the stock. Bloomberg reported that the electric vehicle maker (EV) is continuing to experience pushback from regulators and consumers who increasingly view the brand in a negative light.
Tesla and China
While Farooque did a great job of covering all the main reasons the stock is dipping, I think Tesla’s China problem is worth highlighting because it has the capability of sinking the stock on its own.
Tesla needs continued growth in China to hit its long-term goals, but China doesn’t need a thriving Tesla to meet its aim of a dominant EV market. Tesla has already provided China with everything it hoped for since Tesla secured special terms of operation in 2018. China now has an established EV supply chain, and consumers have an ever-growing array of brand options that they find appealing.
It’s unlikely that the government will need to give special treatment to Tesla or its CEO Elon Musk in the future. In a country with firm control over the private market, that’s a bad sign for long-term performance.
The diminished standing of the American automaker has become apparent in the past few months as the government has continued to impose recalls and public-shaming campaigns. First, China banned Telsa vehicles from government facilities over security concerns, and then regulators pressed for a complete recall of all vehicles in the country over alleged safety issues.
If China was concerned about Tesla’s future in the country, it’s unlikely they’d be making such costly decisions.
This turn by the Chinese couldn’t come at a worse time for the company as it is simultaneously dealing with regulatory scrutiny in America over its driverless vehicle software. Regulators are investigating whether the software could be responsible for multiple deaths and crashes.
Tesla has delayed releasing its full driving technology despite denying the claims that it’s dangerous and Musk repeatedly saying that it would be available by summer 2021.
Technical Take on TSLA Stock
TSLA stock is at a very vulnerable technical area that may lead to a sharp break lower. Shares are hovering right at the critical 200 day moving average and just above major support at $600. 9 RSI is weakening while MACD just generated a fresh new sell signal. Momentum is waning and recently went negative. Any further weakness could lead to a significant sell-off.
Source: The thinkorswim® platform from TD Ameritrade
Adding fuel to investor’s concerns over Musk’s lack of quality control is how he has been dealing with additional regulatory scrutiny from an illegal test flight conducted by his space company SpaceX late last year. The launch violated Federal Aviation Administration safety regulations and exploded after getting off the launch pad. With so much of his time and money wrapped up in that endeavor, it’s left some wondering if he’s able to give appropriate attention to his car company, which is struggling with similar quality control issues.
An extended delay with the software should concern shareholders as driverless capabilities will present one of the few remaining distinctions between the brand and rival automakers, who will soon roll out a massive fleet of competing vehicles. Not only will the rollout cost Tesla market share, it will all but end the EV credit sales to automakers that allowed Tesla to report profits the last five quarters.
Diminishing market share in the U.S. is part of the reason why Tesla needs China so severely. While already the largest EV market in the world, China still has room to grow well beyond the United States simply because its population is more than quadruple in size. But if China underdelivers for Tesla, there isn’t a near-term plan B to offset the shortcoming.
Consumers have also turned against the brand.
Things started to go south in April when a woman hopped on top of a Tesla at an auto show to protest the car’s quality issues. The carmaker botched the public response and fueled enough online pushback to make the company apologize. But while Tesla begins to revamp its image in the country, consumers are selling their Teslas and turning to domestic suppliers.
Domestic rivals like Nio (NYSE:NIO) are making big pushes to capture market share, and it seems unlikely that Tesla will ever return to its 2020 dominance. While these developments will need to play out over the next few quarters before we reach conclusions, the company is looking at a serious issue if they lose their appeal on the mainland.
While it’s always possible for a re-warming of relations between the company and China, the fact that no other American brand has been able to pull off the feat leads me to believe the stock is looking at a downturn. It’s time to sell bear call spreads to position to be a seller of TSLA stock on any rally.
On the date of publication, Tim Biggam did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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