Tesla Stock Nears Breaking Point After Nightmare Quarter

Tesla, Inc. (TSLA) stock is trading lower by about 1% in Thursday's pre-market after the company missed first quarter profit estimates by a massive $1.92 per share and fell short on revenues by more than 12%. The troubled auto manufacturer lost $720 million during the quarter while booking $4.54 billion in revenues. On the flip side, the company reaffirmed production guidance of 360,000 to 400,000 deliveries in 2019, an increase of 45% to 65% over 2018. However, Tesla's spotty track record on past guidance tells sidelined investors to remain skeptical about the company's future.

The apparently mild sell-the-news reaction follows a three-month 27% decline that has dropped Tesla shares into two-year support around $250. Options straddles implied an 8% move after the news, with the small downtick failing to benefit this popular strategy, which would only pay off with a rally or sell-off crossing that threshold. Massive retail short interest has also supported the stock after the news, keeping a floor under price.

Accumulation has now dropped to the lowest level since November 2013, indicating that funds and institutions have hit the sidelines, expecting the company to eventually fail or to continue limping along at the current pace. The mercurial but often irrational CEO Elon Musk has done a strikingly poor job rebuilding shareholder confidence, getting into trouble with NASA after smoking weed on a podcast and defying an SEC settlement order that followed his notorious Aug. 24 buyout tweet.

Tesla entered the second quarter with just $2.2 billion in cash, a 40% decline since the start of 2019, after burning through $650 million for regular operations and paying a $920 million convertible bond obligation because the stock failed to trade at or above $360 in March. This lack of liquidity, along with other significant liabilities, will make it harder for the company to obtain new financing or issue an equity offering that greatly dilutes shareholder value.

Quarterly sales statistics were breathtakingly bad, with the company selling 31% fewer vehicles in the first quarter of 2019 than the last quarter of 2018. The solar business is struggling as well, with a 35% quarterly decline. And ominously, Model S and Model X sales fell a staggering 56% compared to the fourth quarter, even though Tesla reduced their sticker prices in February. Given these bearish metrics, Wall Street analysts and remaining investors could turn on Musk, demanding a CEO change that rebuilds trust.

TSLA Long-Term Chart (2010 – 2019)

Long-term chart showing the share price performance of Tesla, Inc. (TSLA)

The company came public at $19.00 in June 2010 and eased into a trading range with support in the lower $20s and resistance in the upper $30s. It broke out in 2013, entering a momentum-fueled advance that stalled above $280 in 2014. A 2017 buying spike ended above $380 in June 2017, while breakout attempts into 2019 have failed. Sellers have pummeled the stock between vertical relief rallies, with three declines in excess of 100 points taking a steady toll on range support in the $240s.

Tesla stock is now trading just seven points above the deep low at $248 posted in March 2018. September and October 2018 breakdown attempts failed after Musk cut a deal with the SEC, but the subsequent short squeeze to $379 trapped complacent shareholders, ahead of another triple-digit decline. Concurrently, the on-balance volume (OBV) accumulation-distribution indicator has dropped like a rock and is now slumping at a five-year low.

Remaining bulls need to hold range support below $250 at all costs, but that will be easier said than done after the massive loss of institutional sponsorship in the past 10 months. A breakdown will be significant, possibly relinquishing all gains posted since November 2016 while dropping the stock to $150. Unfortunately, an equity offering to build cash could have a similar effect, perhaps delivering a fatal blow to deteriorating investor sentiment.

The Bottom Line

Tesla stock is trading less than seven points above critical range support after a horrible quarter and could break down in the coming months.

Disclosure: The author held no positions in the aforementioned securities at the time of publication. 

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