“Armchair Trader Series” Recommendations
- Week Beginning -
Monday, August 12, 2019

by Ian Harvey

IMPORTANT NOTE: This is a recommendation and individual members can use their own discretion as to when to enter or exit!

You may also wish to read Stock Options Made Easy Trading Philosophy

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Option Trade – Tesla Inc. (NASDAQ:TSLA) Puts

Monday, August 12, 2019

** OPTION TRADE: Buy the TSLA SEP 20 2019 215.000 PUT at approximately $7.00.

Place a high pre-determined sell at $14.00.

Include a protective stop loss of $2.80.

Tesla Inc. (NASDAQ:TSLA) continues to disappoint, earnings lacking and a chart that has started to fall again, as well as more challenging macro-environment stress which are all taking a toll, forging a well-developed shorting opportunity in TSLA stock.

Shares are already off 30% in 2019. That compares to the S&P 500’s gain of 14% despite this past week’s near 6% trade war driven U-turn from all-time-highs.

And Tesla’s recent earnings report did little to quell fears. The report did show TSLA stock is generating free cash flow.

Sales cannibalization from its lower-priced Model 3, global competition running the gamut from upstart Nio (NYSE:NIO) and established names such as General Motors (NYSE:GM) and European luxury giants Volvo (OTCMKTS: VLVLY) and BMW (OTCMKTS: BMWYY), have all continued to take a toll on Tesla. And it doesn’t stop there either.

As TSLA stock bulls failed to put up a fight against wider-than-forecast losses, missed sales estimates and lower non-GAAP margins, its clear Wall Street is growing increasingly tired of growth-filled promises not living up to their initial billing. And that’s making TSLA stock look progressively well-suited for this options trade.

The latest debacle…..

A Tesla Model 3 electric car caught fire after crashing into a parked tow truck on a Moscow motorway late on Saturday, with the Tesla driver saying he had failed to see the vehicle with which he collided.

The driver Alexei Tretyakov said he was in a drive assistance mode in which he was still holding the steering wheel. Tretyakov and his two children escaped the car with only minor injuries, although the car's battery pack caught fire, producing explosions and leaving just the vehicle's metal shell, according to reports.

Tesla Inc has stood by safety claims for its Model 3 in the face of regulatory scrutiny, while documents showed the top U.S. automotive safety watchdog issued at least five subpoenas since last year seeking information about crashes involving the company's vehicles.

Issues continue…..

At the start of this year there started to be significant price cuts. And for a long period of time, Elon Musk had said, "We are going to sell cars at a price, and we're not going to cut prices like traditional automakers." And they have now begun to change their tune on that.

There have been a number of layoffs as well. As well, demand start to turn down, it doesn't seem that there was a clear path out for the company. Right after that, of course, all the store closures occurred. 

Many other instances have occurred…..

  • almost never-ending string of negative announcements,
  • high level executive departures,
  • dates pushed back,
  • statements that they were going to be profitable, and that didn't show up.

Recent earnings…..

There were record deliveries of 95,000 plus cars. However, revenue was down relative to the previous record delivery, which was Q4 in the previous year. Profits were also down. Lost $400 million vs. that previous record delivery quarter, where they made about $140 million.

This means a $400 million loss in the quarter, but Tesla reported positive free cash flow of $614 million. Some of that is due to selling down a significant amount of inventory. Inventory was about a $450 million source of cash.

If you look at their capex, their capex has continued to decline. In Q4 of 2018, capex minus depreciation and amortization was about flat, and that's continued to go down. Now, capex is below depreciation and amortization, which, for a high fixed cost company, is a concern.

Accounts payable have continued to be stretched. There was an increase in deliveries for the quarter, where you would expect to incur higher rate of bills, however, $40 million less use of cash in this quarter than the previous quarter.

The big question mark for Tesla is where they are going to generate cash to be able to pay down the debt maturities they have coming in October?

Departure of JB Straubel…..

Straubel actually had a longer tenure at Tesla than Elon. He's been listed as a co-founder of the company, chief technical officer, and really spearheaded the battery initiatives and the supercharger network of the company.

This continues a trend of executive departures over the past year and a half or so. There have been two general counsels leave, CFO depart, chief accounting officer leave after less than a month, chief information officer leave after less than a year, chief people officer leave after less than a year.

10% of the Autopilot team left following Autonomy Day, including the head of the Autopilot team. When you look at the departure of Straubel and the executive departures that have taken in place over the past 18 months, it is obvious that Elon's a very difficult person to work through.

Insider selling…..

Straubel started a stock selling plan back in November of last year and continued that plan even as the stock had declined. This past week, he registered another five-figure amount of shares for sale.

China Gigafactory…..

China is the biggest EV market in the world. But there's a question, which is, can the Tesla brand go into China successfully and compete in a very competitive market? Certain conditions need to be met, and if they don't meet those obligations, they lose the China factory in 2023.

And the current climate between the U.S. and China is very unfortunate. It's a tough time to be going to do business over there.

Competitive Industry…..

With massive amounts of funding from SoftBank, Google has been throwing a lot of money into the autonomy area. And as mentioned earlier, there are many others delving into this field.

Analysts…..

Royal Bank of Canada reiterated their sell rating on shares of Tesla in a research report sent to investors on Thursday, July 25th. They currently have a $190.00 price target on the electric vehicle producer’s stock.

Also, Tesla has been given a $160.00 price objective by research analysts at UBS Group in a report released on Thursday, July 25th. The firm currently has a “sell” rating on the electric vehicle producer’s stock. UBS Group’s price objective would indicate a potential downside of 31.92% from the company’s previous close.

As well, Tesla‘s stock had its “sell” rating reaffirmed by research analysts at Goldman Sachs Group in a report released on Thursday, July 25th. They currently have a $158.00 price objective on the electric vehicle producer’s stock. Goldman Sachs Group’s price objective would suggest a potential downside of 32.77% from the stock’s previous close.

Several other equities analysts have recently commented on the company…..

  • Barclays upped their target price on shares of Tesla to $150.00 and gave the stock an “underweight” rating in a research note on Friday, July 19th.
  • TheStreet downgraded shares of Tesla from a c- rating to a d+ rating in a report on Monday, April 29th.
  • Needham & Company LLC restated a “sell” rating on shares of Tesla in a report on Sunday, July 7th.
  • Wolfe Research lowered shares of Tesla from an “outperform” rating to a “market perform” rating and reduced their target price for the stock from $375.00 to $265.00 in a research note on Thursday, May 2nd.
  • CIBC reduced their target price on shares of Tesla from $437.00 to $356.00 and set an “outperform” rating for the company in a research note on Thursday, July 25th.
  • Wedbush reiterated a “hold” rating and issued a $230.00 target price on shares of Tesla in a research note on Thursday, July 25th.
  • Evercore ISI reduced their target price on shares of Tesla from $240.00 to $200.00 and set an “underperform” rating for the company in a research note on Wednesday, May 15th.
  • Zacks Investment Research lowered shares of Tesla from a hold rating to a strong sell rating in a research note on Tuesday, April 2nd.
  • ValuEngine lowered shares of Tesla from a buy rating to a hold rating in a research note on Thursday, April 4th.
  • Morgan Stanley reiterated a neutral rating and issued a $230.00 target price on shares of Tesla in a research note on Wednesday, July 17th.
  • Finally, JPMorgan Chase & Co. reiterated a sell rating and issued a $200.00 target price on shares of Tesla in a research note on Wednesday, July 3rd.

Eighteen equities research analysts have rated the stock with a sell rating, ten have issued a hold rating and thirteen have issued a buy rating to the company’s stock. The stock presently has a consensus rating of Hold and a consensus target price of $269.53.

Summary…..

Tesla has a quick ratio of 0.71, a current ratio of 1.06 and a debt-to-equity ratio of 1.71. The company has a 50 day moving average price of $236.11. Tesla has a 1-year low of $176.99 and a 1-year high of $379.49. The company has a market cap of $42.69 billion, a price-to-earnings ratio of -41.09 and a beta of 0.60.