Can Tesla Stock Bounce Back After The Recent Crash?

Tesla Inc stock is down 9% after rating downgrades from analysts and the earnings miss. But Charts show that TSLA stock can bounce back again.

Can Tesla Stock Bounce Back After The Recent Crash

Since the beginning of December, shares of Tesla Inc (NASDAQ:TSLA) had rallied more than 50% going into the recent earnings. This massive rally in the stock was mainly due to the "Trump Effect" and some good news about the Model 3, Tesla's first mass-market sedan. However, the spectacular run was brought to a crashing halt by unimpressive earnings and rating downgrades from several analysts. TSLA stock crashed almost 10% in the next three days. TSLA stock recovered marginally in yesterday's trade after finding support from 50-day SMA (Simple Moving Average) and Bollinger Bands. The past one week has not been exactly great for Tesla. Apart from the rating downgrade, there was also negative news relating to its work culture and its CFO's abrupt departure.

Decoding Tesla Stock's rating downgrade.

Tesla stock was downgraded from "Hold" to "Sell" by Goldman Sachs analyst David Tamberrino after the earnings. The main concerns driving the rating downgrades were the huge cash burn, the SolarCity (NASDAQ:SCTY) merger, the high debt, and expectations of a subdued Model 3 launch. On the Model 3 front, Tamberrino said that he expects a more subdued launch curve than the company is targeting. Model 3 is crucial for Tesla's profitability. In a note to clients, Goldman said that:

We downgrade shares of Tesla to Sell from Neutral with 28% downside to our 6-month price target of $185 (lowered from $190), vs. 8% downside for our coverage. While we believe Tesla currently has a lead relative to OEM peers with respect to vehicle technology adoption, electric vehicle architecture, and (potentially) battery scale, our concerns are more near-term oriented with respect to operational execution on the Model 3 launch, an unproven solar business, and cash needs. Ultimately we see a delayed launch (pushing volume growth out and to the right) and free-cash-flow burn rate (necessitating a capital raise before 4Q17) to weigh on Tesla’s shares.

The interesting part here is that Goldman already had a price target of $190. So the price target cut was by $5 or just over 2.5%. It is interesting that market was fine with the $190 price target, but a $185 price target somehow indicated that the stock is overvalued. More likely, the rating downgrade to sell only acted as a confirmation signal for investors who were already concerned about valuations after the recent rally, and were worried about Tesla's expected secondary offering. Similar concerns have been the reasons behind previous rating downgrades of Tesla stock.

Tesla's insatiable appetite for cash.

One of the major concerns for analysts and investors has been Tesla's insatiable appetite for cash. According to Morgan Stanley analyst Adam Jonas who has a price target of $305 on TSLA stock, Tesla would have spent around $3 billion in R&D and $7 billion in CapEx from 2014 through H1 2017. Tesla’s longer-term plans are equally costly. During the earnings call, Elon Musk said that Tesla could build three more gigafactories taking the total number of gigafactories to five. Cowen & Company analyst Jeffrey Osborne estimates Tesla will need around $25 billion cash in the next three to five years. That's a huge requirement of cash.

Tesla's cash requirements are further accentuated by its huge cash burn rate. In 2016, Tesla lost almost $1 billion in cash flow from operations. Tesla had $3.3 billion in cash on its books at the end of Q4 2016. According to Musk, another $2.5 to $3 billion investments is required before Model 3 production begins. Tesla has been negotiating with its equipment suppliers to delay payments till production of the Model 3 begins. However, Tesla will still need to raise a huge amount of cash from the market. Last year, in a tweet, Mr. Musk has said that Tesla is unlikely to raise capital in the first quarter or even Q2 of 2017.

Given the acute requirement of cash, Tesla is most likely to raise funds sooner than later and more likely through a secondary offering of equity. Tesla will find it difficult raise debt because it already has $5.4 billion in long-term debts. Moreover, its has an unsolicited debt rating of "B-" (junk grade) from S&P. Its debt would have become riskier after the SolarCity merger. When asked during the con call, Mr. Musk said that Tesla might go for a secondary offering just to reduce risk. And Tesla might as well strike when the iron is hot. The rally in the stock price has given Tesla a good opportunity to raise capital at an attractive price. However, a secondary offer will also dilute current equity holders' stake in the company, which will put strong downside pressure on the stock.

Tesla stock still remains a risky bet.

An earnings miss and rating downgrades have brought the rally in Tesla stock to a crashing halt. But, given the huge volatility and the fact that Tesla's stock price is strongly affected by sentiments, the stock can easily bounce back. Any positive news on the Model 3 front could trigger a rally in the stock. Tesla stock currently has support from 50 day SMA which is likely to cap the downside. Also, Bollinger Band indicates that TSLA stock could easily go up. However, the concerns around Tesla's huge debt, secondary offering and Model 3 will continue to act as a tailwind for the stock. Tesla stock remains a risky bet at the current price level.

Kumar Abhishek Kumar Abhishek   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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Comments on this article and TSLA stock

It is bounce is happening right now, even though the price went from about 280.00 to the present, it had gone down to about 244.00 as previously predicted.
To me it's on it's way back up, and because I have seen tsla do this before in the last 5 years.
So I feel it will continue to go up with a few down days, but the trend will continue to be up, especially when the Model 3 starts to sell, then they have a quarter next year that will show a profit.
When that happens then the sky is the limit, but the false news that has said tsla will go down to zero, will never happen.
Tesla Motors will have it's hands in so many companies, and so many companies will be relying on Tesla to do well, that a Tesla Motors failure can never happen.
Never believe a short sellers wishful thinking, I believe they can't afford to buy any shares at these prices, so they make up stuff online, so the hope is the longs will sell, and their thinking is that tsla price will come down, then they can afford to buy, simply because they missed the move up 5 years ago, and that's the actual price they want to pay. Short Sellers should never bet against tsla, and longs or shorts should never expect that they will see a tsla price in the 30's ever again.
Do share this awesome post