Tesla Inc stock is down on negative commentary from analysts. Technical analysis shows that TSLA stock is currently testing a strong support level.
After a strong bull run beginning December last year, which saw shares of Tesla Inc (NASDAQ:TSLA) gain more than 50%, Tesla stock is on a steep decline. Tesla stock has fallen more than 12% since the earnings. Tesla Inc missed on its earnings, however, the miss was not the main reason behind the fall in TSLA stock. Tesla's earnings were followed by negative commentary and multiple price target cuts from analysts spooked the market. Tesla's rating was recently cut by Goldman Sachs which downgraded the stock from hold to sell. As the image below shows, the spate of negative commentary from analysts has led to a strong rise in bearish sentiment.
The rating downgrades and price target cuts were driven by the expensive valuation, rising risks, Tesla's plans for secondary offering and diversification into unrelated businesses. And the thread joining all these concerns is Tesla's humungous need for cash. According to Morgan Stanley analyst Adam Jonas, Tesla would have spent around $3 billion in R&D and $7 billion in CapEx from 2014 through H1 2017. And Tesla will require much more if it wants to carry out its plans of building more Gigafactories as announced by Elon Musk during the Q4 earnings call. According to another estimate, Tesla will need around $25 billion cash in the next three to five years.
In addition, Tesla may need more than $8 billion if it wants to make charging stations as ubiquitous as gas stations. According to a UBS report, drive time to the nearest gas station in the US on average is around 4 minutes while Tesla charging station on average is 30 minutes. According to the same UBS report, to compete with gas stations, Tesla would have to spend $7.5 billion, if it wants to match the current 4-minute average drive to a gas station. But considering that most Tesla owners charge their cars at home, Tesla need not match the density and frequency of superchargers. The expenditure comes down to around $2 billion to ensure a maximum 31 minute drive time to a Supercharger station.
Tesla's unrelated diversification may be a distraction.
Apart from the cash concerns, another major worry for analysts is Elon Musk's habit of getting into unrelated businesses. Tesla is currently in one of its most crucial phases. It is about to launch its Model 3, the success of which could make or break Tesla's fortunes. The risks and complexities related production and launch will require all the attention of the management. The acquisition of SolarCity (NASDAQ:SCTY) has already created a distraction for Tesla. In a note to their clients, Goldman Sachs analyst David Tamberrino said, "the acquisition of SolarCity -- which is undergoing its own business model transition -- comes at a time when we believe Tesla should be singularly focused on becoming a mass automobile manufacturer." And there are reports that Musk is planning to open a boring company and get into the insurance business. These uncertainties and negative commentaries have put heavy pressure on TSLA stock which is trading marginally below its crucial support level.
Can Tesla stock maintain the support from 50-day moving average?.
Tesla stock is currently testing the crucial 50-day simple moving average support line. 50 day SMA has been providing support to TSLA stock since the end of February. Tesla stock had bounced back slightly after testing 50-day SMA on 27th of February. And since then has been trading around the moving average.
Yesterday, for the first time, almost after three months Tesla stock closed below its 50-day SMA. Given that 50-day moving average is technically a very strong indicator for many stocks, Tesla stock could fall much lower, if it is unable to close above the 50-day moving average in next few trades and maintain the support. To make matters worse for Tesla stock, MACD has gone into the negative territory, indicating a bearish trend in the stock. Tesla stock had previously breached the 20 day SMA support line.
There is too much volatility in Tesla stock now and the stock is driven by sentiments more, than fundamentals. Over the past years, Tesla stock has traded in cycles between $180 to $280, rising for three months and then taking about seven months to fall. Currently, the stock is in the "downtrend part" of the cycle. If the stock breaches the support from the 50-day moving average then it could go much lower. However, a continued support could bring some respite to the stock. Tesla stock remains a very risky bet, both in the long and short term.
If you are looking to invest in the technology sector, here are our latest Top Stock Picks from tech sector which have outperformed the market by over 130%.