Electric car maker Tesla Inc. (TSLA) has seen its share price soar over 70 percent in 2017, to a high of $386.99 in late June on investor euphoria around its charismatic CEO Elon Musk and the soon-to-be-produced Model 3 - a more affordable electric vehicle (EV). However, skeptics remain, and the stock is on track for its worst week since September 2016. The question is, will Tesla be able to deliver on Musk's ambitious promises?
While it's good to be the first player on the field, Tesla is set to face rigorous competition from established players in the auto industry. Detroit-based General Motors Co. (GM) has already begun selling its all-electric Chevrolet Bolt and Volkswagen has said it will have a range of electric cars in production by 2020. In addition, Volvo announced that 100 percent of its cars will be electric or hybrid, which will include five new all-electric vehicles by 2019. "When we said it, we meant it. This is how we are going to do it," Hakan Samuelsson, president and CEO of Volvo Cars, said in a statement.
Even thought they are late to the game, the big players have the inherent advantage of geographical reach through established lines and greater access to funds (Tesla's long-term debt rose 223 percent in 2016, according to FactSet data) meaning the road ahead for Tesla could be a bumpy one. (See also: Volvo to Phase Out Combustion Engines By 2019.)
While Tesla has substantial backers, its inability to turn a profit is putting pressure on its debt. These debt concerns grew in late 2016 when Tesla acquired SolarCity in a $2.6 billion deal, something Musk said was "a no-brainer." However, industry experts argued that combining two high growth, high cash burning businesses will chew up capital, increasing its leverage. The result would be a company having to take on a greater amount of debt.
Not only is Tesla taking on more debt, servicing that debt continues to be an issue. For the first quarter of 2017, Tesla reported a net loss of $330 million, its 15th quarterly loss over the last 16 quarters, according to FactSet data.
The fact that its balance sheet remains firmly in the red has seen short sellers flock to bet against the California-based car maker. As Tesla's stock price soared in the first half of 2017, losses for the skeptics grew. However, the mounting losses haven't deterred the haters. Tesla is now the most shorted U.S. stock and second most in the world behind Alibaba with more than $10 billion in outstanding shorts. As the losses on the shorts have mounted, CEO Elon Musk sent a message to those betting against him.
These guys want us to die so bad they can taste it
— Elon Musk (@elonmusk) June 8, 2017
However, as Tesla is heading towards official bear territory – a 20 percent sell-off from the high – those shorts will likely to increase, putting further pressure on its stock. (See also: Short Sellers' Biggest Losers in 2017.)
Along with the short sellers, many analysts are reassessing their price targets. The big hit came Wednesday when U.S. investment bank Goldman Sachs downgraded Tesla's share price from $190 to $180, saying they expect the upcoming Model 3 launch to undershoot market expectations. (See also: Tesla Only Worth Half Its Share Price: Goldman)
The success of the Model 3 will determine the near-term success for Tesla, and one analyst questions whether Tesla is starting to doubt the success of its new EV. "While a Tesla streaming music service might serve a great unmet human need, it isn’t a sensible or profitable focus during its most important product launch to date. These items are distractions for investors, and it doesn’t feel altogether unintentional," research firm Hedgeye said in a note.
"From what we can see on the soft side, all is not well with the Model 3."
TSLA Breaks Its 50-day Moving Average
If fundamentals aren't enough, the 10 percent weekly plunge has seen Tesla break some critical levels. On Wednesday, as the stock fell 7 percent it breached the 50-day moving average of $339 and a significant up trend from its December 2016 low. If shares in Tesla trade under $309.58 it will have fallen 20 percent from its all-time high meaning it is officially in bear market territory.
The next big technical levels for Tesla are the psychological $300 and the 200-day moving average, which is currently $261.32.
Down But Not Out
Like all Silicon Valley pioneers, Elon Musk is staring at possible adversity. Shares in the electric car maker continue to slide as the auto giants are now posing a real threat to his EV market. The continued lack of profitability is posing questions whether Musk and Tesla can jump start the sales of the Model 3 and put the increasing apprehensions to rest. In the past, Tesla shares have bounced back to drown out the negative press, however, for now the doubters' bells are clearly ringing.