Reality Starting to Set in More for Tesla and their Stock


Tesla stock has been in freefall since last December 10, with its losses over the last 5 months now at 44%. Given their outlook and how the stock is trading, this could all get worse.

Investors don’t always insist on a strong positive bottom line to be willing to take a stake in a company, and Tesla is certainly a good example of this being optional sometimes. If a company shows a lot of promise, people may be willing to look the other way on such things as a company losing instead of making money right now, if they expect to be rewarded for their patience.

The outlook of many investors extends well beyond last quarter, this quarter, last year, or this year. Those who trade in stocks have various levels of patience, anywhere from a stock not moving during the first few seconds of their trade to several decades of disappointment.

Everyone has their threshold, although along the way, when both the company and its stock is struggling, more and more people may get off of the bus as it weeds out the non-believers, as the conditions that their beliefs are founded on fail to materialize in a manner acceptable to them.

Some may have bought Tesla 9 years ago when the stock was first offered and it could be had for around $20 a share, and they may be sitting back today and reveling in a return that still is averaging over 100% a year even with the stock beat down over these last months. That’s well beyond what investors normally expect for a return, and they may base their decisions on staying the course or not in more difficult times on how much they have made already from the trade.

Others may have bought in higher and may be sitting on some pretty significant losses, and like someone’s gains may keep them in the trade, losses very often will do the same. When we are up, we may mistakenly believe that we are playing with house money, and when we’re behind, we may stubbornly insist on looking to get back what we are down in the trade.

We Need to Assess Our Holdings By Looking Forward, Not Backward

Both of these views are not only incorrect but dangerous, as we should never base our decisions upon our net profits or losses, as the market doesn’t care about such things. The stock will perform however the stock performs, and any analysis of our position must be confined to the stock itself, it’s probable performance, and our being ahead or behind has nothing to do with this.

Since the bottom hasn’t completely fallen out of this stock, and it’s still trading around $200, a lot of people have not lost faith in this company, even though they are failing at the goal of any business which is to turn a profit. Under the circumstances, Tesla has held up quite well, even though it’s lost almost half of its value lately. We may wonder how long this can continue though as well as where we might go if more air gets taken out of this balloon.

The tariff war with China does weigh more heavily upon Tesla than your average business, and the feeling is that seeing this conflict escalate is the last thing that this company wants right how. Sure, Tesla has clearly taken a hit since the news of tariffs going up hit the street, but they haven’t needed any help to keep sinking, mostly under their own weight.

Tesla is taking in plenty of money, and had revenue of $4.54 billion last quarter, even though that was $300 million short of what the analysts were expecting. Tesla’s demise is not about not meeting revenue expectations though, or about revenue at all, it’s about their continuing to lose money.

We see stocks drop in price when they fail to meet expectations but still have generous amounts of profit to report, but when the street thinks that you will lose $1.30 per share last quarter and you lose $2.90 per share instead, that’s just not good at all. The fact that this company is losing that much money in a quarter after all this time in business is the biggest concern though.

All this bad news only took us down to around $250 a share, and it’s now around $200, so this does not seem to be earnings driven so much as it is investors tiring of this whole thing. Tesla keeps raising more and more money with their junk bonds to cover these deficits, but this can only go on for so long unless they turn this around, which remains a fairly open question.

This is a lot like the United States on fast forward, where we wonder, at a time far away from now, what will happen when they can no longer raise the money that they need to make the payments on their debt. This time may not be so long away for Tesla though, and this would obviously sink their stock to the bottom of the sea.

Selling Cars Below Cost Can’t Be Sustained Forever

Tesla sells a lot of cars and is the world’s business all-electric car company, but all of these cars are selling below cost. Presumably, there really isn’t a viable market for these cars, because if there was, they would be charging a lot more for them and still selling them. This is what needs to happen for them to become a success, which is actually a big challenge.

Analysts as a whole, for whatever reason, tend to be overly optimistic with struggling companies, where the glasses they wear might be tinted a little rosier than they should be. If someone came up to you on the street, for instance, and told you that they had a hot stock tip, with a company that has been in business for 16 years and still hasn’t figured out a way to do anything but lose money, and the stock is getting hammered as well, you probably would not become too excited about it.

Perhaps Tesla will survive and be fabulously profitable one day, or profitable at all one day, but that day is not today. We may like the sense of adventure of jumping on a boat that is taking on this much water, but we need to ask ourselves if this makes sense when the sea is this violent, and we may at least want to wait for calmer waters for the stock at least, if not the company.

If Tesla stock somehow starts taking off, and you wanted to go along for this ride, with your eyes cast upon the horizon enough to be able to get off if the weather takes a real turn for the worse, you may not care about whether they are making money or not so long as you are.

Right now, the waters are rough indeed, and there may be little to stand in the way of their adding pretty significantly to this 44% down move.

The average price target for Tesla is around $300 a share, which right now we could call a whopping $300 since it would have to go up by 50% now to get there. Wedbush analyst Daniel Ives just dropped his target from $275 to $230, although he maintains his “neutral” rating in spite of using the term “code red” to describe Tesla’s current business situation.

This is like seeing your house half burn down and assess its health as neutral. It’s very commonplace for analysts to avoid sell ratings though, perhaps because the people they work for may not want them to be so blunt or even to have their ratings match the truth that much, but this stock is a sell if there ever were one.

When the market goes up by 20% and your stock goes down by more than 40%, that’s deserving of a code red right there. It would be a big code green if you were on the short side though, as there has been much to celebrate on this side this year with Tesla.

When we short, we borrow stock from people who hold it throughout these events, and then eventually buy it back. If the stock goes down like Tesla has, those holding the stock lose a lot of money, and those who borrow it make a lot, on their backs actually.

We might think that it is too late to get in on this party, but it might not be. Chasing shorts isn’t really any different than chasing long positions, and we chase long positions all the time as investors and traders. The idea is to get on the bus while it’s travelling in your direction but be standing at the door when it’s time to get off, and not hesitate.

The rule of thumb here is that if you would not initiate a position right now with something, you shouldn’t be in one either, although this is a secret kept by top traders and we’re lucky that investors even care about the road they are going down, let alone use an approach like this, even though it may make a lot of sense.

Morgan Stanley’s Adam Jonas just lowered his worst-case target for Tesla from $97 a share all the way down to $10. As far out as this may seem, the actual worse-case scenario for them would be bankruptcy, and when you’re discharging money into the ocean at the rate that they are and paying so much to borrow to keep your ship afloat, this is far from unrealistic.

This is not to say that this will ever happen, but it is in the conversation at least right now, and has been for quite a while actually if we dared to take an honest look at their business. Tesla both was built and survived on hope all these years and little else, and when the hope dwindles enough, this can really put the hurt on a stock in a way that is well beyond anything we’ve seen thus far.

The fact that Tesla broke below $200 on both Monday and Tuesday and then recovered enough to get back over this line by the end of the day may provide a little hope that we might break this fall soon, but like everything else about Tesla, it is just hope at this point.

The further we go down, the more people will get concerned, and when analysts cut their targets, even though they may still end up with ones quite bloated, this is going to affect things. There could still be a good amount of money to be made with this stock, by betting against it instead of for it, and there may not be all that much ahead to cause us to worry about it going up all that much either, as there sure hasn’t been any this year.

For those on the long side of it who have chosen to stay, the term caveat emptor certainly applies here, and the caveats may be far from showing themselves fully.

John Miller


John’s sensible advice on all matters related to personal finance will have you examining your own life and tweaking it to achieve your financial goals better.