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Why the Rally of Tesla Stock Could Reverse

Tom Taulli

Since December, Tesla (NASDAQ:TSLA) stock has been agonizing for the longs, as the price had gone from $356 to a low of $177, despite the rally of the stock market. During this period, there have been nice rallies in the shares of giant tech companies like Facebook (NASDAQ:FB), Netflix (NASDAQ:NFLX) and Microsoft (NASDAQ:MSFT).

Competition Is Closing In on Tesla and TSLA Stock

Source: Mike Lau via Flickr (Modified)

Tesla stock has generally been volatile. After all, most new automakers have failed miserably!

But over the past week, TSLA stock has risen 5%. Can this  uptrend last? Or could this mostly be a relief rally by TSLA stock as the short sellers close out their positions? Keep in mind that, during the first quarter,  the company reported a disappointing 63,000 deliveries.

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Well, of course, TSLA CEO Elon Musk is supremely optimistic. At this week’s shareholder meeting, he set out to answer some of the questions swirling around Tesla.

Perhaps the most important statement from Elon Musk was the following: ““I want to be clear: there is not a demand problem. We have a decent shot at a record quarter on every level. If not, it will be very close.”

Let’s hope so. Because if TSLA doesn’t deliver on the forecast by Elon Musk, then TSLA stock will certainly take another hit.

Other Risks Facing Tesla Stock

The irony is that a spike in deliveries may create its own issues for TSLA.  Note that Elon Musk also said that Tesla’s  growth will probably not be cheap.  If TSLA’s margins decline, the increased production will put lots of pressure on its bottom line.  It’s also worrisome that TSLA has a solar-installation business, which is also capital intensive.   At some point, it would not be surprising for Elon Musk to need to raise billions more from Wall Street.


Another concern is that Tesla’s overall business is getting more complex. It’s building a massive battery factory in China and has one planned for Europe as well. TSLA is also looking at entering the insurance industry and is considering building a robotaxi network of 1 million vehicles.

At the shareholder’s meeting, Elon Musk even mentioned that TSLA may get into the mining business, in order  to have more control over the supply of commodities it uses, like lithium and cobalt. In the meantime,  the company will start  producing the Model Y, a compact SUV.  The Model Y and  the Tesla Semi freight truck are both slated to be launched in late 2020.

Elon Musk has never lacked for ambition. But even he has limits. Does he really need to do all these things?

The Bottom Line on Tesla Stock

Based on analysis from third parties like Electrek, it does look like TSLA has seen a pick-up in demand during the past couple months. Yet this uptick may prove to be temporary.

One reason is that the federal tax credit for purchasing Teslas will decline from $3,750 to $1,875 by the end of this month. In other words, people may be rushing to buy Tesla’s vehicles before the credit drops. A similar phenomenon probably occurred at the end of last year, when Tesla’s deliveries reached a record.

Meanwhile, TSLA has been aggressively reducing the prices of its vehicles. That could boost its unit sales, but also hit its margins. According to analysts at Cowen: “Basic microeconomic theory would suggest that goods or services that don’t have a demand problem, don’t see their prices lowered by half a dozen times in 4-5 months.”

Finally, competition is likely to become a bigger factor, especially in China, which is a meaningful part of Tesla’s growth strategy. There are multiple companies that only make electric vehicles in China, including Nio (NYSE:NIO) and more well-established firms, such as BYD (OTC: BYDDF).

So in light of all this, it’s probably best to be skeptical on TSLA stock despite its latest rally.

Tom Taulli is the author of the upcoming book, Artificial Intelligence Basics: A Non-Technical IntroductionFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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