Just one quarter ago, Tesla Inc (NASDAQ:TSLA) crossed the $300-per-share mark. Now, shares seem bound to hit $400 very soon. TSLA stock continues to ride a wave of positive momentum, driven by analyst upgrades and general market enthusiasm.
Source: OnInnovation via Flickr
However, more bearish indicators continue to pile up. Among them, the price of gas is sliding, and combined with the threat of reduced subsidies for electric vehicles, it could serve as a one-two punch for Tesla’s pricing competitiveness. On top of that, the company’s Autopilot safety record is coming under fire.
Will these accumulating flaws finally put the brakes on Tesla’s stock price?
Cons of TSLA Stock
Autopilot Issues: Tesla appears to be having serious issues with its autopilot roll out. Six months after the debut of Autopilot 2.0, it’s unclear whether the new version has even reached parity with original Autopilot. The company’s claims that autopilot is now “smooth as silk” still seem dubious.
And the company is getting bad press on the accident front.
The National Transportation Safety Board released a report on a deadly crash from last year. The NTSB said the man who perished was driving with his hands off the wheel for extended periods despite the software advising him to take control. Subsequently, Tesla updated its software so that it disables Autopilot if the driver ignores audible warnings. In any case, the report didn’t settle well.
Shortly thereafter, Tesla’s head of software left the firm, saying: “Turns out that Tesla isn’t a good fit for me after all.” He had worked for Tesla for just six months, raising further questions about how autopilot software is developing.
Gas Prices Slumping: The price of crude oil has dropped sharply in recent weeks. NYMEX crude started the year around $54/barrel, however it has fallen to just $43 today. This, in turn, has led to a sharp decline in the price of gasoline.
RBOB gas, the traded commodity, has fallen from $1.68 to $1.42 year-to-date. The price paid at the pump is higher, due to taxation and other added costs. However the underlying gas price has dropped more than 25 cents and that swings the value proposition toward conventional vehicles and away from electric ones.
As long as oil continues to slide, cheap gasoline will cause auto buyers to favor standard gas-powered engines.
Subsidy Phase-Outs: Tesla still relies heavily on subsidies to motivate potential buyers. Particularly with gas prices already low and declining further, electric vehicles benefit greatly from tax breaks. However, governments may shrink or end these over time.
In Denmark, for example, the government previously exempted electric vehicles from a punishing auto import tax. In 2016, following the rule change, Tesla sales in that country plunged from 2,738 vehicles to just 176. That’s a 94% decline, and one that should scare TSLA stock owners.
To be fair, that’s a dramatic example, and most markets that reduce or eliminate subsidies won’t see such drastic effects. However, the underlying threat is real. It goes without saying that Tesla should have low expectations for federal subsidies from a Trump-led government, though some states will be happy to keep large subsidies. Denmark could be the canary that warns of more trouble in Europe as well.
Despite that continent’s more progressive positions on climate change and other environmental issues, they occasionally make cost-cutting driven decisions as well. A move by several European countries to slash solar subsidies a few years ago hampered that industry.
Pros of TSLA Stock
China Plant: Earlier this week, Tesla announced that it will be building a plant in China. There are still some details to work out. For example, Tesla needs a local Chinese partner with which to set-up a joint venture.
Once everything is finalized though, it will greatly enhance Tesla’s competitiveness in China. The country charges a 25% tax on imported vehicles. This taxation causes Tesla vehicles to cost more in China than they do in the United States. Once the new plant is built, it will allow Tesla to compete on a level playing field.
It’s vital that Tesla avoid the tax, since more than 200 companies have announced plans to build alternative energy vehicles in China. Tesla is positioning itself to compete strongly though. Tencent Holdings Ltd (OTCMKTS:TCEHY) decision to buy 5% of Tesla earlier this year serves as a powerful marketing tool for Tesla; there should be opportunities to advertise through WeChat and other Tencent properties.
More Upgrades: Despite the steady increase in the price of TSLA stock, analysts haven’t lost enthusiasm for the firm. Germany-based Berenberg added to the bullish enthusiasm recently with a big price target.
Berenberg’s analyst Alexander Haissl lifted his share price target to $464, representing 20% upside upside for TSLA. He takes an Amazon.com, Inc. (NASDAQ:AMZN) view of Tesla. He argues that Tesla’s near-term results are “unimportant” as the company operates in a way to maximize long-term free cash flow generation rather than near-term profits. That’s a risky approach, but the results can be huge when it pays off.
Powerful Momentum: TSLA stock keeps ripping to new all-time highs with great frequency. This has led to ever-more hedge funds and other commentators declaring Tesla to be a big short. So far, these skeptics have only lost money.
And they are doing so at an alarming rate. Bears have sold 30% of Tesla’s float short. This level has been consistent since January, despite the sharp run-up in the stock price. Bears have dug in, and refuse to admit their error, at least as of yet. However, when stocks make parabolic runs, skeptics often throw in the towel before the stock peaks.
If that pattern holds, expect a short-squeeze driven rally as Tesla stock heads over $400 per share.
TSLA stock remains one of the leading battlegrounds of our current bull market. Either you believe in Mr. Musk’s vision, or you don’t.
I’m skeptical that the business model will eventually work out as Berenberg suggests. However, at least in the short run, the bulls continue to control Tesla.
I’d avoid short positions. And if you have more confidence in Tesla, it’s still worth holding for more near-term gains.
As of this writing, Ian Bezek did not hold a position in any of the aforementioned securities. You can reach him on Twitter at @irbezek.