by Umar Farooq
Tesla shares saw an epic rally in the past few month with stock going up 50% in two months. This massive rally in the stock was mainly due to the “Trump Effect” and some good news about the Model 3, Tesla’s first mass-market sedan. However, the spectacular run was brought to a crashing halt by unimpressive earnings and rating downgrades from several analysts. The shares of the carmaker have come back down to Earth. The stock has declined 10% over the past few days.
Tesla reported fourth quarter 2016 earnings last week and, unsurprisingly, didn’t make any money, although the company lost less than expected. The core explanation for Tesla’s pullback is that analysts are skeptical that CEO Elon Musk and his team will be able to launch the $35,000 Model 3 on time later this year and ramp up its production in 2018 to levels that would enable Tesla to achieve Musk’s mandate of 500,000 deliveries (Tesla delivered less than 80,000 cars in 2016).
Tesla outlined a number of updates on its business, one of the more noteworthy being that its CFO is leaving. While not always a bad sign, a resigning CFO is not something investors generally like to see. Especially after the company’s acquisition of SolarCity.
Goldman Sachs downgraded Tesla stock to a sell. The downgrade sounds bad, but notably the price target only dropped to $185 from $190. Still, that would represents a decline of roughly 26%. Is that type of decline in the cards? With TSLA stock, it’s hard to say.
The markets don’t seem capable of pricing Tesla rationally anymore. Over plenty of six-months periods since the stock really took off in 2013, Tesla has either appeared to be heading toward $300 – or to $50. The rally of 2017 is just the most egregious example. So far, it has found support between $245 and $250, near its 50-day moving average. If the stock can maintain this level of support, it’s likely to go higher, absent a broader market pullback.
Bottom line is that despite the recent plunge in stock price, there are a ton of positives going for TSLA stock right now. But along with this, Tesla has been known to over-promise and under-deliver. It’s quite possible that it won’t be able to execute with precision on each of its business. The resignation of its CFO makes it more likely that Tesla will miss the mark, financially speaking. Also, adding in a money-losing business like SolarCity makes both business- and financial-execution even more difficult. Due to this, although we may not see a further sharp decline in the stock price – unless a broader market correction materializes – a decline toward Tesla stock’s 200-day moving average seems more probable.
by Umar Farooq