The stock market has experienced significant fluctuations since the onset of the novel coronavirus. While some companies, like Netflix (NASDAQ:NFLX) and Amazon (NASDAQ:AMZN), have rightfully soared during the shutdown, the recent “triumph” of Tesla (NASDAQ:TSLA) and Tesla stock produces far more questions than it does answers. Outside of the rumored inclusion in the S&P 500, there is no valid reason to be a buyer of TSLA stock anywhere near current levels.
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After a brief pandemic-caused shutdown, Tesla’s China sales are back up, and the company has already launched the new, more affordable Model Y. Its plans and plants in other countries are back to full speed too.
However, as outlined in Stanphyl Capital’s June 30 letter to investors, it’s the details beyond those headlines that paint a bleaker picture for Tesla stock.
Tesla Stock Faces Increased Competition in the EV Market
Global competition in the electric vehicle (EV) market is beginning to shrink Tesla’s market share. China is the most prominent example, with a growing domestic sector cutting away what was supposed to be Tesla’s big step forward.
Worse yet, China’s tax credits have forced Tesla to sell at a near break-even price, making ramped up production a possible cost-burning measure. Europe, too, has continued to produce more competitors and doesn’t seem more promising for the company’s profitability.
Elon Musk’s Quality Control Problems
Tesla’s recent efficiency problems should compound investors’ concerns over this added electric vehicle competition. On June 24, J.D Power announced that Tesla recorded the most first-year issues for new car owners in the country. Since the company is rushing to increase output because of the shutdown delay, it’s unlikely that quality control will increase. And with the company already dealing with investigations over a parts deficiency cover-up and the continuing autopilot crashes, there’s little room for serious error.
Pattern of Inefficiency
History shows that these issues with consistency and safety aren’t a fluke; they are commonplace with CEO Elon Musk’s companies, and this should fuel further skepticism in the future of Tesla stock.
Take, for example, SpaceX, Musk’s rocket company. While it has experienced some successful revenue-driving supply missions – including the recent launch of two astronauts into space – quality control lapses still happen with frequency, as evidence by the Starship rocket explosion coming just days earlier. This was unwelcome news for a company that has been dealing with federal investigations over safety issues related to their rockets.
In many ways, the short market is against Musk himself, not Tesla. Musk oversees a network of companies that are intertwined in mission and finances. For some, Musk’s portfolio is a high-risk house of cards waiting to topple, perhaps the highest risk-reward venture ever undertaken. But after 20 years of his companies’ operating in venture industries, he still hasn’t developed a stable product or any noticeable innovative moat. And that’s probably the most damning thing.
Musk was an early entrant into commercial space and electric vehicles. But by offering little in the way of protected innovations, he opened the door for competitors to jump into the market. The emergence of Nikola (NASDAQ:NKLA), Rocket Lab, and Blue Origin in the realm of space – along with the aforementioned new participants in the EV marketplace – is only the beginning. Investors should tread carefully.
Tesla stock is very overbought on almost every technical metric. 9-day RSI broke 90 before finally weakening. MACD reached the highest readings in the past six months but has softened. Bollinger Percent B also got to the loftiest levels in the prior half year as it reached over 135.
Tesla stock is trading at a massive premium to both the uptrend line and the 20-day moving average. The last time Tesla was this overbought, it led to a subsequent 50% pullback in the shares over the following month.
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Source: The thinkorswim® platform from TD Ameritrade
More importantly, TSLA stock had a massive reversal day yesterday. Shares traded all the way up to nearly $1,880 before reversing course dramatically to close under $1,500. This type of price action is usually a sign of a top. The buyers have finally become exhausted and the sellers have taken control. It is even an more valid signal given that TSLA had rallied almost 80% in July before collapsing yesterday.
Stock traders should use any meaningful strength to short TSLA stock. Option traders may want to take advantage of extremely high implied volatility and sell out-of-the-money bear call spreads to position to be a seller on a further move higher.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a weekly option and volatility newsletter can visit the Options and Volatility Newsletter website.
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