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Is Tesla Inc (TSLA) Stock Really Going to Crash 26%?

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Shares of Tesla Inc (NASDAQ: TSLA ) have been on a tear in 2017, up 17% despite a double-digit drop in shares since mid-February. After reporting earnings on Feb. 22, TSLA stock initially rallied before turning south.

Tesla (TSLA)

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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.

A few days later, 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.

Because it's one of the market's few "cult" stocks, Tesla trades without being tied to valuation. On a valuation basis, it's quite easy to argue that it should go lower. Like Amazon (NASDAQ: AMZN ), though, betting against this stock on valuation alone has been nothing short of a suicide mission.

In that regard, what's the best way to play Tesla stock?

Click to Enlarge Source: StockCharts

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.

The Bear Case for TSLA Stock

Technically speaking, TSLA stock looks decent near current levels. That said, Goldman's downgrade really hurt. That tells me there's likely some "weak hands" still holding the stock that bought in the rally from $180 to $280 from December until mid-February.

Tesla's acquisition of SolarCity is also a concern. While having some great products, the solar maker also burned a tremendous amount of cash. Consider this: Around the time of the acquisition announcement, Tesla and SolarCity were burning roughly the same amount of cash. The difference? Tesla's market cap was more than 10 times the size of SolarCity.

So to say SolarCity has a hole in its pocket is an understatement. Additionally, SolarCity quietly cut 20% of its staff at the end of 2016. The cuts were pretty much across the board in an effort to preserve cash.

That bring capital into the discussion. It's likely that Tesla will need to raise capital in the form of an equity raise. SolarCity adds to its needs, but expanding its Gigafactory footprints and gearing up for Model 3 production will be expensive too. TSLA will want to make sure it has money in the bank.

The Bull Case for TSLA Stock

Tesla stock does have some positives going for it, too.

Initial Model 3 production is slated to begin in July, with volume production set to start in September. This can turn into a risk, though, if the company experiences any significantly delays. Tesla also expects to deliver 47,000 to 50,000 Model S and X units in the first half of 2017. That's notable, given that the company only delivered 76,000 units in 2016. Hitting roughly two-thirds of that amount in the first half of 2017 shows strong momentum. Additionally, Gigafactory expansion shows that demand is strong.

TSLA stock could also benefit from its continued venture into energy. Tesla's Powerwall product combined with its SolarCity unit could create a nice synergy. It expects to launch its solar roof business this fall too.

Notably, Tesla stock has also benefited from a less-talked about catalyst: infrastructure projects. A new development has Tesla acting as the backup power source for cities with its large fleets of refrigerator-sized batteries . This could pave the way to more consistent sales and earnings to buoy the ups-and-downs of Tesla's other businesses.

The Bottom Line for Tesla

There are a ton of positives going for TSLA stock right now. With that said, Tesla has been known to over-promise and under-deliver. It's quite possible (and almost likely) that it won't be able to execute with acute precision on each business.

The loss of its CFO makes it more likely that Tesla will miss the mark, financially speaking. Add in a money-losing business like SolarCity makes both business- and financial-execution even more difficult.

Tack on a potential capital raise, and TSLA stock could be ripe for more downside.

Do I think a 26% decline is in the cards? I'm not betting that way, unless a broader market correction materializes. Instead, a decline toward Tesla stock's 200-day moving average seems more plausible.

We can re-evaluate Tesla if and when we get there.

As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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