Tesla Stock: Too Bad to Buy, Too Good to Short

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Tesla (NASDAQ: TSLA ) has delivered more bad news to start 2019. The company cut prices on its vehicles, missed Q4 delivery targets, issued disappointing guidance and laid off 7% of its workforce. Tesla stock is down 12% so far to start 2019, but a longer-term look at TSLA's trading action shows it has been a disappointment for both bulls and bears.

Tesla's difficulties in expanding to the mass market are keeping its stock down. It's massively large outstanding short position is keeping it up. Until something major changes, Tesla stock will likely continue going nowhere for both bulls and bears.

The Tesla Stock News

In the third quarter, Tesla reported its first quarterly profit since the Model 3 launch. It then kicked off 2019 by reporting a Model 3 delivery miss in Q4 and issuing a $2,000 price cut on all three of its vehicle models.

The price cut came in response to a nearly 50% reduction to the $7,500 U.S. tax credit for electric vehicle purchases starting in 2019. Going forward, the credit has been reduced by $3,500. Tesla is essentially eating $2,000 of that reduction itself in an effort to prop up demand.

Last week, Tesla stock was hit even harder when the company announced it would be cutting its workforce by 7% in an effort to cut costs. Tesla also guided for Q4 profits to decline sequentially.

The 800-pound gorilla in the room is Tesla's $920 million in convertible senior notes set to expire on March 1. Tesla was plagued by negative cash flow up until Q3 of 2018. TSLA stock is currently nowhere near the $359.87 conversion price of the notes. Therefore, Tesla may be forced to pay out the debt in precious cash. Tesla reported just $3 billion in total cash on its balance sheet at the end of Q3.

Why the Tesla Bulls Are Wrong

Tesla bulls often focus on the company's impressive revenue growth and the long-term vision of its CEO Elon Musk. However, growth and leadership only go so far on Wall Street if a company can't demonstrate a viable long-term financial plan. For Tesla, that plan includes selling Model 3's on a much larger, mass-market scale. It must do so while maintaining margins, cash flow and profitability.

Musk himself tweeted last week that competing on cost with legacy auto makers is "an extremely difficult challenge." Skeptical Wall Street analysts have said that Tesla is in a very difficult spot.

This week, Goldman Sachs analyst David Tamberrino said the latest commentary from Tesla confirms his suspicions that the majority of Model 3 demand comes from the lower end of the vehicle's price range. Tesla has said it will eventually offer a $35,000 base version of the Model 3. The cheapest version it has offered so far is a $44,000 version. As the mix shift of vehicle sales for Tesla drifts lower over time, Tamberrino said "margins will likely mix-down" as well.

Needham analyst Rajvindra Gill said this week that Tesla's gross margins will dip back below 20% to 19.6% in 2019. He also said revenue growth will drop from 84% in 2018 to 23% in 2019. From there, it will fall to just 9.5% in 2020 as Tesla depletes its backlog of high-end vehicle demand.

In a nutshell, Tesla needs mass market demand to maintain its revenue growth. It needs lower prices to generate that demand. Lower prices mean lower margins and less cash flow. Cash flow problems mean difficulty paying down debt.

Why the Tesla Bears Are Wrong

Tesla bears love to point out all of the problems with the bull thesis described above. Unfortunately, the Tesla bear thesis has just as many holes.

The primary problem with shorting Tesla stock is that it is among the most heavily shorted stocks in the world. According to S3 Analytics , Tesla has an outstanding short position of around $7.5 billion. Not only does that make Tesla's borrowing costs high, it means every significant dip in the stock price is met by short covering. It also means that the stock is an extremely dangerous short squeeze candidate.

In addition, no matter how bad things get at Tesla, there's no denying the company's luxury vehicle models and name brand have value. That means there's likely limited downside thanks to the potential for Tesla to be a buyout target for a larger auto or tech company if the price is right.

The Bottom Line for Tesla Stock

For the past two years, no matter how good or bad the Tesla headlines have gotten, Tesla stock price has stayed in a wide range between about $250 and $390. Traders who want to play the swings can make a pretty penny in the near term. But until something major changes with the company's fundamentals, the stock will likely continue to make very little overall progress.

As of this writing, Wayne Duggan held no positions in the aforementioned securities.

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The post Tesla Stock: Too Bad to Buy, Too Good to Short appeared first on InvestorPlace .

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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