Tesla’s (TSLA) shares fell down more than -7% in early European trade to begin this week, after Elon Musk polled his followers on Twitter if he should sell 10% of his stock, explains Boris Schlossberg of BK Asset Management.
The typical Musk theatrics aside, the key question going forward for investors is whether Tesla stock may have peaked for the near term, setting it up for a nasty correction. The answer may be yes.
- All the good news may be factored in.
- Hertz deal could backfire.
- Musk may sell 10% for real.
Over the past several months, Tesla has become the ultimate meme stock. It is soaring well past the $1,000/share mark, with a $1 trillion valuation on a smattering of positive news releases, including better-than-expected latest quarterly numbers, and a possible 100,000 order from Hertz rental cars. The news has sent the stock into a buying frenzy over the past several weeks, but the flows may soon turn viciously negative against Tesla bulls.
Like all meme stocks, Tesla trades on hype and, for now, the stream of positive news may have run its course. The Hertz news has been priced in, and any forward developments could only serve as a source of disappointment, especially if the formerly bankrupt Hertz is unable to come up with the financing capital for such a massive purchase, or Musk backtracks on the deal. Several analysts have suggested that Musk may not want to have Tesla—which is a premium brand—exposed to all of the bumps and potholes of the rental car experience, which could create a spate of negative publicity for the company, especially if there are any fatalities associated with the brand due to auto-assist features or battery fires. Fatalities affect all car brands of course, but no car company attracts attention like Tesla, and such PR power is a two-edged sword.
Tesla as a manufacturer is finally facing legitimate competition from new entrants and legacy ICE manufacturers. Recent reviews of the upcoming Rivian pickup truck and SUV, as well Ford Mach-e, as well as a slew of lesser known models from Korean makers, have shown that many of the car manufacturers are beginning to catch up in design and battery production. In fact, the performance gap between Tesla and the rest of the auto industry has narrowed markedly. The company does enjoy a serious advantage in its supercharger network, and that is truly its one great competitive edge, but it is likely to erode as other manufacturers begin to pour billions of dollars into fast, reliable charging points, without which the EV market will not gain any broad consumer traction.
For now, the Tesla brand is effectively the EV market, and as long as the company maintains its unicorn status, the stock will continue to display its meme-like characteristics. However, over the next 12 months, we may finally begin to see a broader adoption of EV technology. The moment Tesla becomes just another EV carmaker, its stock will lose much of the magical luster.
Musk himself may be starting to realize this. His tweet poll is just the latest in a stream of manipulative messages that he has issued on the social platform over the years. Some analysts have pointed out that his true intentions, to liquefy a portion of his net worth, may have more to do with his pending $1.5 billion tax bill, and his aversion to borrowing further against his current stock position.
Regardless of his motives, if Musk does begin to liquidate his holdings, TSLA’s share price could quickly dip below $1,000 as market makers pull their bids and the latest wave of retail buyers face steep mark to the market losses on their positions.
Although volatility in the stock is extremely high, the January 2022 1200/1000 put vertical could be the safest way to express a near-term bearish view on the stock, with downside clearly limited, and the $1,000 share target very much in view if investor enthusiasm on Tesla begins to cool by year end.
To learn more about Boris Schlossberg visit BKForex.com.