It is a year since Tesla stock began its current rally. Tesla Inc (NASDAQ:TSLA) continues to face several challenges.
It was not a long time ago when Tesla Inc (NASDAQ:TSLA) stock was racing away to the $400 mark, briefly snatching away the crown of largest U.S automaker by market cap from General Motors (NYSE:GM). The rally in Tesla stock had begun almost exactly a year back, after the U.S elections. The initial fillip came after Elon Musk was inducted into President Trump's CEO Advisory Council, from which Mr. Musk quit earlier this year.
From there Tesla stock continued to rally despite not much improvement on the fundamentals front. With the bulls taking charge, Tesla stock brushed away all the concerns about cash burns, high leverage, and an expensive valuation. By June end this year, Tesla stock had almost doubled driven mostly by the "vision" of Elon Musk. However, the journey since then has been a bit rocky, to say the least, as some of the concerns are back in sight.
Traders had piled up $10 billion worth of short position.
The rally in Tesla stock had not gone unnoticed by bears who continued to short Tesla stock hoping that serious concerns around its cash burn and expensive valuations will bring the stock back to earth. By May, around $10 billion worth of Tesla stock was shorted, making it the most shorted U.S company at that time in terms of dollars at risk. However, Tesla stock continued to rally, leaving shorts with over $3.7 billion in losses.
Tesla stock is down on Model 3 disappointment.
However, the story has changed a bit in the last couple of months. Tesla stock is down by over 21% since closing at its all-time high of $385 in mid-September. There are several reasons for this correction. One of the main factors driving Tesla stock was the euphoria around Model 3, Tesla's first mass-market car. Tesla had defied several skeptics by announcing the launch and aggressive production schedule of its mass market model. The company had promised to hit a production run rate of 5000 Model 3 units per week by December this year.
However, like most of its earlier promises, Tesla failed to deliver on it. Tesla was only able to produce 260 Model 3 vehicles in the third quarter, and has pushed back its 5,000 units per week goal to the end of March, proving the bears right. While the disappointment on the Model 3 is one of the main reasons behind the recent correction, other factors have also weighed in. Non-GAAP auto-segment gross margin came in at 18.7%, 630bps lower on YoY basis. Tesla posted $535m in operating loss, 30% above consensus, with higher SG&A expenses. Non-GAAP EPS loss came in at $2.92 vs $2.3 consensus. With the exception of revenue, (Tesla revenue came in at $2.98, up 30% YoY) the electric car manufacturers third quarter earnings result disappointed on most of the fronts.
Can Tesla stock stay above $300 for long?
Adding to the disappointing third-quarter earnings, the new tax-reform bill further compounded Tesla investors' misery. The bill eliminates a $7,500 tax credit for new electric vehicle purchases. Tesla buyers have long benefited from that provision. The combination of poor earnings and the proposed elimination of tax credits took Tesla stock below the psychologically important $300 mark for the first time in more than six months. While the Tesla stock has managed to close above the $300 mark in the last few trading sessions, it is not completely out of the woods yet.
Bears continue to bet against Tesla stock as they see the stock still trading at very expensive valuations despite huge cash burns and very high debt. The troubles with Model 3 production will also continue to weigh on the stock. According to latest short interest data, traders had increased their bet against Tesla stock with short interest rising by 2.4%. While dollars at risk has come down to $8.2 billion now, Tesla still remains the most shorted stock in the U.S, according to analytics firm, S3 partners. While Tesla stock could move up, the gains are likely to be very limited as sentiment continues to remain bearish. MACD has hit the lowest level in more than a year. Update on Model 3 production will be the key driver from here.
— S3 Partners (@S3Partners) November 9, 2017
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