Tesla Stock Could Head Lower In The Near Term

Tesla's stock price could follow its falling bond price, and the charts also suggest there's more pain ahead.

Tesla stock could head lower in the near term

Shares of Tesla Inc (NASDAQ:TSLA) have had a rough time over the last couple of months. In what was undoubtedly a great start to the year, Tesla shares had risen by close to 80% in the calendar year, as of June 23rd. They have, however, declined by nearly 13% since. In spite of the growing excitement around Tesla's progress with its mass market car, the Model 3, and the unveiling of plans to work on an electric semi-truck, Tesla stock has continued to fall. The bearish sentiment around Tesla is also taking the shape of a decline in its bond prices. Tesla recently issued its first traditional bond, and the demand for these securities was rather strong. However, after an encouraging initial response in the secondary market, the price of the bond has fallen. The current scenario could make things difficult for Tesla, which has been constantly raising funds from capital markets. What's more, the technical set up for TSLA stock suggests that there could be more pain ahead in the near-term. All in all, Tesla shares look poised to head lower in the coming days.

Tesla Bond Price Fall.

Tesla's bond price has fallen, and given the company's cash burn and frequency of raising funds from capital markets, the company can't really afford such a development. Tesla recently issued its first traditional bond, and much to the surprise of some analysts, the demand was strong. In fact, demand was strong enough for the bonds to be oversubscribed, and allow Tesla to not only raise more money than they had initially outlined, but also raise these funds at impressively low interest rates. Tesla raised $1.8 billion, about $300 million more than it had initially planned to raise. That apart, the company managed to raise these funds at a surprisingly low coupon rate of 5.3%. However, the same enthusiasm hasn't sustained in the secondary market.

After initially trading above the face value of $100 and nearly touching $101, "The price of the bond has dropped to 97.75 cents on the dollar in recent trading, pushing the yield up to 5.65%, according to data from MarketAxess." Bond yields rise when bond prices fall, since the coupon rate is now available at a price below the face value. Coming on the back of strong demand in the primary market, this fall is rather unexpected. Further, this comes at a time when U.S. Treasury yields have declined. 7 year U.S. treasury bonds saw yields fall from about 2.15% as of 25th July, to as low as 1.99% yesterday. Typically, a fall in the benchmark rates should have supported the prices of Tesla's 8 year bond. Interestingly, the opposite has happened. As it appears, there seems to be a broad risk-off approach to junk corporate bonds lately, and this could potentially be the cause for the fall in prices. We'll look at this in more detail a little later, but whatever be the reason, Tesla can't afford this.

Tesla has been constantly tapping the capital markets to raise funds. And its cash burn rate has only increased over the last few quarters, in the run up to its Model 3 production ramp-up. Tesla burnt through about $1.16 billion in cash in its second quarter, spending on capacity for the Model 3, and boosting battery output. That's a massive rise from the $622 million it consumed in the immediately preceding quarter. And while Tesla had over $3 billion in cash at the end of the second quarter, that adds very little comfort, considering that the company has consumed nearly as much in the last 3 quarters. Tesla's negative free cash flows over the preceding three-quarters have totalled to over $2.5 billion. Further, with the company looking to add new products to its line up, with the likes of its electric semi-truck in the pipeline, turning free cash flow positive may not be easy.

With falling stock and bond prices, accessing capital markets could get tougher for Tesla if the trend continues. This is likely to shift the onus on meeting production deadlines and rolling out as many vehicles as possible to generate cash. And based on Tesla's track record on this front, this is not going to be an easy task. Tesla may still continue to surprise us by managing to raise capital at low prices. However, given the dynamics at play currently, doing so is going to get tougher. Tesla's debt securities carry a junk rating, and recent reports suggest that junk-rated corporate bonds could be losing favor. Quoting from one such report:

"US junk-rated corporate bonds have suffered their biggest two-day losses in nine months, sending risk premiums on the asset class to the highest level since April." Further, it says, "Spreads on more than a dozen other junk US corporate bonds increased by more than 50 basis points".

Tesla Stock Technical Analysis Shows More Downside Risk.

If you look at Tesla's technical chart, you'll notice that the stock found support at its 100 day Simple Moving Average (SMA) yesterday, after breaching its 50 day and 20 day SMAs two days ago. While support at its 100 day SMA is a positive, the fall below the 20 day and 50 day SMAs is a bearish sign.

The stock was also on the verge of seeing a bullish crossover, as the 20 day SMA was poised to rise above the 50 day SMA. However, after yesterday's fall, the two moving averages seem to be parting ways again. If the stock price continues to fall, it could breach the 100 day SMA, which it hasn't done in a long time. The 100 day SMA is a strong support for the stock, and breaching this support level could drag the stock lower.

Another key development from yesterday is the bearish Moving Average Convergence Divergence (MACD) crossover. The MACD has fallen below the signal line, which suggests that there could be more downside in the near term. The stock is also far from oversold territory, if you look at either the Bollinger Bands or the Relative Strength Index, suggesting that there's very little that could turn the sentiment around for the stock right now.

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Vikram Nagarkar Vikram Nagarkar   on Amigobulls :

Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice.

Buying and selling of securities carries the risk of monetary losses.Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions.

Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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