Can The "Tech Summit" Cause A Short Squeeze In TSLA Stock?
- Short interest in Tesla stock jumped by 13% in the last fortnight.
- Tesla stock has recently received multiple rating cuts.
- Tesla stock is facing strong resistance from the 50-day SMA.
Tesla (NSDQ:TSLA) stock has declined by 20% YTD, massively underperforming the market. But while investors are reluctant to invest in the stock, Tesla has been one of the favorite stocks of short traders for some time now. In the latest fortnight, the short interest in TSLA stock jumped by 13% to 35.68 million, a massive 32% of the float, with days to cover increasing from 6 days to 8 days. Since August, short interest has jumped by almost 35%. With days to cover rising to 8 days, a strong positive news may lead to a short squeeze. But is there any positive news around the corner for Tesla stock? One source could be tomorrow's "tech summit" with the President-Elect to which Mr. Musk has been invited.
It is not only the short sellers who are piling up on Tesla stock. Similar action can be seen on the options front as well. The put/call volume ratio indicates that bearish investors are increasing their bets on Tesla stock. Here is a report from Schaeffer's investment research analyzing the activity in Tesla options:
In TSLA's option pits, put open interest ranks in the 98th percentile of its annual range, after hitting an annual peak on Friday. TSLA's 10-day put/call volume ratio at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) sits at 1.20, higher than 92% of all other readings from the past 12 months, indicating a healthier-than-usual appetite for bearish bets during the last two weeks.
Why The Bearish Sentiment?
1) Balance Sheet Risk
The bearish sentiment around Tesla stock has been growing since Tesla announced the SolarCity acquisition. Many analysts and investors believe that the acquisition will increase the balance sheet risk for Tesla. Not only does SolarCity have a huge debt burden, but it is also a cash guzzling company. In addition to that, Tesla will need billions of dollars next year for capital investments and Tesla itself is not a cash-generating machine. High debt, huge cash burn and the upcoming huge investment aren't a good combination. (Also Read: Solar Roof Over-hyped, Tesla Motors Inc Needs Volume)
2) President Donald Trump
The election of Donald Trump has added another uncertainty around the stock. Many believe that Mr. Trump's energy policies will adversely impact Tesla Motors. The Trump administration is not only likely to loosen the environmental rules, it is also unlikely to continue the electric vehicle tax credit. Currently, every Tesla buyer receives a $7500 credit. However, many believe that the loss of credit won't impact Tesla sales much. Also, since Tesla is an "America First" company, most of its facilities and jobs are located in the US, the President-Elect's policies are likely to reward Tesla over its competitors such as GM and Ford.
3) Model 3 Risks
However, for many investors, it is the risks surrounding the Model 3 which are the major concern. Model 3 is Tesla's biggest hope. Tesla has received more than 400K bookings for the Model 3. The company expects to ride on Model 3 demand to profitability. It plans to start the production of the car towards the end of 2017. However, there are multiple challenges for Tesla.
The first major hurdle is the funding requirement for Model 3. Tesla will need huge funding for Model 3, but given its current balance sheet, Tesla may find it costlier to raise funds from the market, especially in a rising interest rate environment. Rising interest rates may also dampen the demand, as it will make mortgages and auto loans more expensive. There is also concern regarding Tesla's ability to meet its Model 3 production plans. Cowen's analyst Jeffrey Osborne feels that the Model 3 production target is too ambitious, one that the company will not be able to achieve.
The intensifying competition in the electric vehicles space is another headwind facing Tesla Motors. Many expect GM's "Chevvy Bolt" to give strong competition to Model 3. The Bolt will feature a 238-mile driving range vs 215 miles for Model3 and cost $37,500, just above Model 3's $35K. Electric cars from other manufacturers may not only impact the demand for Model 3 but also affect Tesla's other revenue source - the Zero Emission Vehicles Credit. In the first half of the year, Tesla earned more than $100 million from the sale of ZEV credits. Also, the cost of lithium, which Tesla uses for its batteries, is likely to rise by 17% next year further impacting its margins. (Also Read: Can GM And Toyota Hurt Tesla Motors?)
Tesla Stock Is Facing Resistance
Tesla stock is currently facing strong resistance from the 50 day moving average. The strength of a resistance line increases with every unsuccessful attempt of the stock price to breach the resistance line. As can be seen from the chart above, Tesla stock has tested the 50 day SMA on multiple occasions but has been unable to breach it. Hence, the 50 day SMA is a strong resistance line for the stock. Tesla stock will find it difficult to breach the resistance, especially since the volume is declining in the last few trading sessions indicating that the upward trend is exhausting its strength.
Tesla Stock Continues To Remain A Risky Bet
The bearish sentiment has been piling up on the Tesla stock since the announcement of the SolarCity merger, earning it price target cuts and rating downgrades, even from Tesla bulls. The recent launch of "Solar Roof" indicates that Tesla continues to remain a hub for innovation, but the short to medium term story continues to be hazy. In the near term, any good news could lead to a short squeeze. Tesla stock continues to remain a risky investment, due to its balance sheet and business risks.
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