For all investors involved with Tesla (TSLA), we have a simple message: Proceed with extreme caution.
Tesla bulls should consider stepping aside until the market provides an all-clear. And Tesla bears should limit their exposure through the use of put options (or some other means of capping upside spike risk).
Tesla is an extraordinary company in many ways. As a stock investment, Tesla fuels extraordinary levels of emotional reaction. For investors who follow Tesla — one of the highest profile companies in the world — the stock tends to be loved or hated. There aren’t many people in the “neutral” camp.
Emotion (whether positive or negative) is dangerous when it comes to investing. Because emotion gets in the way of thinking rationally.
Strong emotions attached to an investment can cloud thinking … distort judgment … exaggerate cognitive biases … and sometimes lead to extreme behaviors.
When all these factors add together, you get a kind of nightmare recipe for making bad decisions, which can then lead to painful regrets.
The Tesla outlook is dangerous now, for bears and bulls alike, and the strong emotional component heightens that danger. That is why we suggest bears should limit their total risk exposure — and bulls should consider stepping aside for now.
On the bearish side, Tesla is a dangerous stock to bet against for one simple reason: Elon Musk.
As an entrepreneur and a visionary, Elon Musk has a history of making doubters eat their words. He has done things with reusable rockets that nobody believed possible. And Elon Musk has tens of millions of supporters and investors and followers worldwide, all of whom believe deeply in his plans and capabilities.
This alone makes Tesla a dangerous stock to “short” (bet against). Companies with a deeply devoted following … and an investor base with true believer levels of faith … can run higher at a moment’s notice.
Then, too, if Musk succeeds in his goals for Tesla, the company could grow to a valuation of hundreds of billions and beyond, joining the lofty ranks of Apple and Amazon.
That’s the positive side. There’s a lot of bullish optionality in Tesla.
The dark side is that TSLA shares could conceivably fall 50% from here … or even 80 to 90%. There’s even a real possibility the stock could go to zero. Let’s take a look at why …
Musk, Tesla’s genius founder, has gotten some horrible press these past few months. He has made huge public blunders on at least three different fronts.
First, Musk tweeted “funding secured” for a possible Tesla takeover when that was clearly not true, which was a potential attempt to manipulate the stock price and a violation of securities laws.
Second, Musk accused someone on Twitter (apparently without evidence) of being a pedophile.
And third, Musk smoked marijuana on a public podcast, jeopardizing his SpaceX security clearances (and shocking investors at a time when his reputation was vulnerable).
As a result of all that, Elon Musk and Tesla now face a criminal investigation from the Department of Justice … a civil investigation from the Securities and Exchange Commission … a class-action shareholder lawsuit … and a defamation lawsuit from a Thai cave rescue diver.
In addition to the above troubles (which are deadly serious), Tesla as a company is burning through its cash at an alarming rate. Tesla reportedly has $11 billion in long-term debt, no profits, and a cash-burn rate of thousands of dollars per minute.
As of this writing, Tesla has a little over $2 billion left in its coffers. That money may be needed to cover operating losses (as the company continues to burn up cash).
Tesla may also need to raise billions more for expansion commitments (like production lines for a new electric truck). It could also need additional billions just to meet Model 3 obligations.
But this is where things get dangerous. It’s hard for public companies under SEC investigation to raise new capital. For companies under both civil and criminal investigation, it’s even harder to raise money.
So, Tesla may not be able to tap public markets again for the cash it needs. Or, if Tesla does manage to tap public markets, it may be forced to do so on such onerous terms that the share price plummets.
It gets worse. The DOJ investigation into Tesla has been called a “Pandora’s Box.” Because while the DOJ will begin by investigating whether Musk’s tweet was an illegal attempt to manipulate the stock price, their investigation won’t stop there.
Once they start poking around, the DOJ could find other violations — and securities law violations are quite serious on their own. It’s not inconceivable Musk could wind up in jail. This is a low probability, but the possibility is real.
And then there’s the class-action shareholder lawsuit. Musk personally, and Tesla as a company, could conceivably find themselves on the hook for estimated and punitive damages in the $10 billion range.
Neither Musk nor Tesla has that kind of cash on hand. Such a judgment could bankrupt Musk, and bankrupt the company too. Until the suit is resolved, this cloud could hang over the company for years.
As a result of all the above, it’s little surprise that senior executives are now fleeing Tesla. Ever since Musk’s disastrous “funding secured” tweet in early August, corporate officers are dropping like flies.
Tesla’s chief accounting officer, the head of human resources, the head of communications, and the VP of global supply management are all out. The VP of worldwide finance is leaving in October. More resignations may be coming.
The news is not all bad. All of Tesla’s models — the Model 3, Model S and Model X — received perfect five-star ratings on NHTSA crash tests. And there are still Wall Street analysts making a bullish case.
It remains possible that Musk could pull through once again and that the TSLA share price could rise like a phoenix from the ashes and soar to untold heights.
But it’s also possible (as mentioned above), that the stock could fall by another 50% … or 80% or 90% … or even go to zero under the most extreme circumstances.
As the below chart shows, TSLA has been in the SSI Red Zone for nearly six months. For bulls, this is a sign to proceed with extreme caution or to consider stepping aside completely.
And if you are bullish, you don’t have to lose faith or give up hope. But given the serious dangers and the realistic possibility TSLA shares could fall dramatically from here, you might consider stepping aside until TSLA returns to the Green Zone.
For those of us watching Tesla from the sidelines, there’s a lesson here too. Emotional attachment can be dangerous with any type of investment, whether it’s an exciting, change-the-world stock like TSLA or a plain vanilla dividend play.
This is another way in which easy-to-use software tools provide an advantage. The arm’s-length analysis helps you stay calm and detached, which helps keep destructive emotions out of investing.
Richard Smith, PhD
CEO & Founder, TradeSmith