Tesla Inc (NASDAQ:TSLA) stock declined nearly 4% on reports of Model 3 production issues. Is TSLA stock in for more downside?
Shares of the Elon Musk-led electric car manufacturer Tesla Inc (NASDAQ:TSLA) are unable to break out of the recent downtrend they have been caught up in. Tesla stock gave up almost all the gains of the last week in the last trading session. We had earlier suggested that TSLA stock is likely to be under pressure due to its Model 3 production issues. Further, negative reports about Model 3 production have delivered a blow to investor sentiment again. This raises an important question, Is Tesla stock in for more downside from here? Should you jump in now to buy the dip? Let's take a closer look.
Model 3 could make or break Tesla stock.
A recent report of Tesla producing Model 3 by hands has not gone down well with the investors. This also raises questions about the quality of Tesla products which demand a high premium and could hurt the Tesla brand if found to be true. Recently, Tesla missed its latest Model 3 production target by a big way yet the stock gained irrespective of the setback. We had maintained our stance for long that Model 3 is very crucial to Tesla stock's fortune and rightly the Model 3 news did some damage to the stock. Many on Wall Street believe Model 3 could deliver the 'iPhone moment' for Elon Musk's company. Barclays analyst Brian Johnson echoed a similar sentiment but suggested it is only a matter of time before a section of Tesla bulls could lose patience if the company shows further signs of not being on track for the company's lofty production target of 500,000 vehicles in 2018. And, reports of Model 3 assembly line not in functional shape are only making life more difficult for Tesla.
Tesla's earlier announced production target of 5000 Model 3 units per week by the end of the year looks highly daunting and any negative news on this front could only hurt Tesla stock badly. Tesla's Model 3 also has a massive role to play in the company's future profits as Toni Sacconaghi of Bernstein suggests Model 3 could have a massive impact on the company's gross profit margin. Elon Musk had promised a 25% margin on the Model 3, similar to Tesla's other models, but with the Model 3 production issues and other factors, he sees it as difficult for the company to have the same margins. And, with 70% of the production capacity being catered to Model 3 next year, Model 3 holds all the strings for Tesla's iPhone moment which many are betting will come when Model 3 finds a place in almost every garage in the US.
That's not all, there is another reason to worry for Tesla investors. For now, Tesla may lack quality competition in the electric vehicle category but Mary Barra led General Motors (NYSE:GM) is breathing down its neck. GM recently confirmed that it is following its electric vehicle Bolt with at least 20 new all-electric models by 2023. What's more, the first two will arrive within next 18 months and that too based on a new architecture which may also include the fully functional autonomous-driving system. Kyle Vogt, CEO of GM's self-driving subsidiary Cruise Automation had recently stated they could soon start the production of a modified Chevy Bolt at their Michigan facility with all the autonomous-driving features. The smooth production of Chevrolet Bolt EV, much before Tesla's Model 3 went into production, shows that once the quality of EV makes an impression among the users, in no time, GM can scale its production to flood the market with quality EVs. This may not be good news for Tesla in the long run. If the company fails to fix its production mess, it could be robbed of its iPhone moment by the likes of GM.
The charts have a lot to say about Tesla stock.
The Tesla stock technical chart doesn't have many positives to offer for investors. After the decline in the last trading session, Tesla stock made multiple bearish crossovers. Tesla share price fell below its 50-day and 100-day simple moving averages (SMA) in a bearish move. The 100-day SMA has been a strong support for the stock for most of 2017. However, the stock has struggled to stay above the key moving average recently after going below it once last month. There is one positive in the form of the Relative Strength Index (RSI) reading falling to 26.09, suggesting the stock is now in oversold territory. But, the Bollinger Bands indicator is yet to flash an oversold signal and generally, the combination of both RSI and Bollinger Bands is considered a strong signal. Hence, investors considering to buy the dip will do well to closely follow the charts before making a move. Tesla stock still remains a high-risk bet.
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