Tesla's (TSLA) long slide that has dropped shares below the $200 threshold in recent days is bringing the bear case for the company front and center.
Shares of the Palo-Alto-based automaker were down about 5% in early pre-market trading on Thursday, which had initially set up the Elon Musk-led company for its lowest open since early December 2016 before reversing trajectory shortly before the open. Still, numerous analysts caution investors of a potential bear case for the company.
According to FactSet, 16 analysts have cut price targets in the past month, with a smattering of analysts downgrading the stock as well. The momentum on the stock has clearly inverted from its typical pattern as bullish investors lose their nerve.
"With fundamentals deteriorating, specifically deliveries/production that are starting to stall as well as losses/cash burn that are not turning a corner on a sustainable basis, some of these optimists now appear to be taking a much more pessimistic stance, with the stock breaking down in recent days," Bank of America analyst John Murphy noted.
He retained his "Underperform" rating as concerns remain about the company's long-term prospects and the continued erosion of share value.
"Tesla may now find itself in a cycle where a lower share price may itself contribute to a potential deterioration of employee morale as well as potentially increased counterparty risk with both customers and business partners (suppliers, governments)... potentially further impacting fundamentals," Morgan Stanley analyst Adam Jonas wrote in a note to clients on Tuesday.
He set his "Bear case" price target at a paltry $10 per share amid the risks and the emerging "distressed credit story" that is overshadowing what had long been a growth narrative.
Is the Bridge to China Out
One of the potential catalysts for the company following a recent capital raise was its Gigafactory build-out in Shanghai and the potential to capitalize on Chinese auto demand.
The capital raise has been largely seen by Wall Street as a bridge to seize on these opportunities in 2020.
"Our China Auto team is extremely constructive on the outlook for Tesla to gain share with a domestically sourced Model 3 and Model Y," Jonas noted as a potential positive. "We believe the 2019 airpocket in Model 3 demand may largely continue until an affordable, locally produced Model 3 is available in that market."
However, given the increased geopolitical risks surrounding the region, this has turned into more of a question mark than a catalyst.
"To the extent trade tensions between the U.S. and China are focused on industries and technologies with national security/IP sensitivity, we would expect Tesla's China story may continue to be heavily discounted by the market," Jonas warned.
That is not to mention the high-profile car combustion that is likely to impact consumer sentiment and soften the already weak demand for Tesla vehicles in the region.
"Given the increased debt load, geopolitical exposure (demand increasingly dependent on China), and potential for negative news flow to impact fundamentals, we have lowered our bear case valuation for Tesla," Jonas concluded. "The reduction in our bear case to $10 is driven primarily by our concerns around Chinese demand for Tesla products."
Short Squeeze?
Still, given shorts have taken out the long knives for the stock, some analysts are pointing to the potential for a pop on a short squeeze in the near term.
"Although far from taking a constructive view on TSLA, it appears much of the pressure on the stock over the past few days/weeks has been driven by shorts pressing aggressively, as the stock (and story, to some extent) was already breaking down," Bank of America's Murphy said.
$TSLA short interest is $8.10 billion; 38.41 million shares shorted; 29.32% of float; 0.63% borrow fee. #Tesla. Shs shorted decreased by 834k, -2%, over the last week. Shorts are up $277 mm in mark-to-market profits on today's -3.5% price move bringing YTD profits to $3.88 billion pic.twitter.com/Xf0XC7O7jh
— Ihor Dusaniwsky (@ihors3) May 20, 2019
"In our view, this could set up for a short squeeze in the coming days/weeks/ months should deliveries, profits/losses, cash flow/burn come in even slightly better than draconian expectations, or should Musk introduce another business venture and/or longer-term financial target that once again gets bulls excited about the story," Murphy surmised.
For longer-term investors in the company that might be cold comfort, as many of even the most bullish analysts expect a sustained storm of headwinds for the stock.
"Demand concerns, credibility questions, and messaging/communication (including a recent email announcing "hard core" cost cuts) have weighed on TSLA shares in recent weeks, and we think it could take several weeks/months for the narrative to shift," Baird analyst Ben Kallo advised clients.
He retained his "Outperform" rating for the stock in the long run, helping the FactSet consensus hold tenuously to a "Hold" rating on the stock.
The question that will arise amid the share declines is whether or not the margin call fears expressed by short-sellers do come to fruition, which would likely present a "code red" scenario for shareholders.
