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Tesla (NASDAQ: TSLA ) stock has been on a monster rally over the past several days. In fact, TSLA stock rallied over 10% in just four trading days after closing at $300.36 on Jan. 3. Certainly some of the move higher can be attributed to the overall relief rally seen generally in stocks at the start of a new year, especially in the most shorted names like TSLA. Eventually, however, sustainable profitability does matter. Given the history of the company to over promise and under deliver, I look for Tesla to struggle mightily in 2019.
The electric vehicle tax credit is an essential component of Tesla's business model, and CEO Elon Musk relies heavily on the credits to maintain sales, as well as the company's profitability. One need only look at what happened to sales in Hong Kong (crashing an astounding 95%), when the tax credits were eliminated. There are also rumblings out of Washington to eliminate the electric vehicle tax credit entirely.
Tesla also just reached the electric vehicle subsidies limit , meaning that one of the main drivers of sales will be phased out in 2019 and eliminated completely by 2020. Undoubtedly many buyers rushed to take advantage of the much higher $7,500 tax credit for 2018, essentially pulling future sales forward and contributing greatly to the profitable quarter in Q3. Now that the tax credits will be dramatically less, look for both revenues and earnings to weaken substantially over the coming quarters.
While TSLA did finally report a profit last quarter , it marked only the third time that happened since the company went public in 2010. As we just discussed, much of this can likely be attributable to short-term demand to fully take advantage of the EV tax credit program. Tesla stock will likely suffer dramatically without those EV tax credits to bolster future sales, especially given that competitors like BMW, Mercedes and Porsche will still be able to offer the credits for years to come.
Technically, TSLA stock is looking decidedly overbought. Momentum is starting to reach extremes that coincided with significant market tops in the past. Tesla stock failed to break out above the 50-day moving average and also failed to make a fresh new high yesterday, both signs of fatigue.
Elon Musk and Tesla continue to face the same monumental hurdles that have plagued the company over the past with actual profitability being at the forefront. Elon Musk himself stated that the company was on the verge of bankruptcy in 2018 . Yet the unfettered optimism and faith in the future of Tesla somehow remains undeterred by many. Investors and traders, however, should focus on fact and not faith. The facts point to a sharply lower price for TSLA in 2019.
I would look to short TSLA stock at current levels with the first downside price objective being the $300 area.
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 .
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