(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of TSLA.)
Tesla Inc. (TSLA) shares are breaking down and have now entered dangerous waters based on technical analysis. Shares fell by nearly 3.5% Wednesday, to roughly $326 in afternoon trading, which could be signaling an even further decline, potentially pushing the stock towards $300. The stock has broken some critical technical levels that could set off some alarms, as nervousness starts to build going into the company's quarterly results on Wednesday, November 1, after the close of trading. Investors have been eagerly awaiting updates on the progress for the launch of the Model 3, the company's mass-market, four-door sedan, starting at approximately $35,000. (For more, see also: Tesla: Tech Company or Car Company?)
Baird analyst Ben Kallo threw some fuel on the fire this morning, cautioning investors ahead of the third quarter results, according to a report on the Fly on the Wall. But the analyst also noted that any weakness due to the result would likely be a buying opportunity. Shares of Tesla have been through this up and down ride before, with shares falling from around $380 to $300 in June and July, only to rebound.
Technicals Breaking Down
The decline in the stock now takes the stock to levels not seen since August, while putting the stock in jeopardy of falling further ahead of results because the stock has now broken significant support levels. A decline below $325 would snap a technical support level and would send the stock quickly to $300, a drop of another 7%.
The chart above shows how the stock has broken all the recent uptrends, which have now been in place since March. With those uptrends now broken, the stock needs to hold support around $325 to avoid further declines. Even more important is the $300 level, which itself has acted as support on many occasions, most recently back in July. (For more, see also: Tesla Puts Dangerous Products on the Road, Says Einhorn's Greenlight.)
The options market is showing signs that it believes that shares of Tesla are due to fall as well, with the most active options for expiration on November 17 being the $300 strike price. Nearly 2,000 put contracts have traded at the price of $6.00. That would suggest that traders are betting shares could fall to a price of $294, the breakeven price for buying the puts.
If Tesla can manage to hold around the $325 level, it would be positive, but that would not mean shares are out of the woods. The stock price would need to retake one of the two uptrends in the charts.
For now, going into results, investors seem to be cautious and for good reason. Tesla has a history of significant cash burn, which create the need for an equity raise again at some point in the future. Add in the uncertainty around any commentary regarding the Model 3 could make the result more than interesting.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.