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Following two blockbuster years for Tesla stock, investors in the company find the stock down over 20% YTD as of 8/30/22.
High momentum and growth stocks that trade primarily on the whims of ever-changing trader sentiment find themselves in a predicament when in a prolonged drawdown: traders get bored and seek new pastures.
Rising skepticism of the stock meets a number of potentially bullish catalysts, and it has us asking if Tesla's day in the sun is over or if it's just a spat of clouds that will quickly clear up.
Trading Tesla in Either Direction
The Direxion Daily TSLA Bull 1.5X Shares (TSLL) and Bear 1X Shares (TSLS) seek daily investment results, before fees and expenses, of 150%, or 100% of the inverse (or opposite), of the performance of the common shares of Tesla, Inc stock. These daily leveraged ETFs allow sophisticated traders to get magnified or inverse exposure to popular individual securities, in order to seek profit or hedge risk regardless of market direction. There is no guarantee the funds will meet their stated investment objective.
The EV Tax Credit is Back
Congress recently passed the Inflation Reduction Act, which removes the cap on tax credits auto manufacturers can utilize. Tesla passed the 200,000 cap back in 2018, removing Tesla vehicles from eligibility for the $7,500 tax credit. Until now.
Furthermore, analysts are most excited about a $40,000 tax credit for large commercial EVs, like the Tesla Semi, which is planned to start shipping by the end of the year.
Of course, the legalese determining which vehicles are eligible for the new tax credits within the bill is highly complex, raising questions about which Tesla models will be eligible for the new credits.
And while Elon Musk claims to be against EV subsidies, they’re good for his business. A study in Energy Policy found that every $1,000 in tax credits translates to a 2.6% increase in EV sales.
The new regulations for tax credits went into effect on August 16, and manufacturers like Tesla and General Motors, who have reached the 200,000 sales cap for the tax credit, will be eligible for new credits at the start of 2023.
The Twitter Overhang
Markets hate uncertainty more than anything else. Tesla CEO Elon Musk is currently involved in ongoing litigation with Twitter over his acquisition offer for the company. Should the Delaware court rule against Musk, he could face a $1 billion breakup fee or be forced to close on his $44 billion acquisition offer.
This litigation creates massive uncertainty for Tesla stock, especially because Musk recently sold another $7 billion in Tesla stock even after stating that he wouldn’t sell any more shares of Tesla to finance his deal back in April when he sold roughly $8.5 billion in Tesla shares to fund his acquisition.
Many times, the conclusion of a momentous catalyst like a court decision or earnings report can lift the uncertainty surrounding a stock, even in the worst possible outcome for the catalyst.
The case is set to go to trial on October 17, however Musk requested to delay the trial until December recently amid whistleblower allegations, a request the court has yet to respond to.
Look out for the potential that Musk and Twitter settle out of court before the case goes to trial, which could send Tesla shares up significantly.
Is Big Production Growth In Store for Q3?
Unlike other automakers, Tesla was punished by the summer of pain in the US economy. Both inflation and recession worries reached a fever pitch in Q2. And following a weak second quarter in terms of both sales and production growth, Wall Street analysts are projecting growth to resume the previous trend. Analysts expect Tesla to earn roughly $3.16, representing a YoY growth of 70%.
Some expect the production troubles in Q2 to be a blip on the radar, extraneously related to lockdowns in China creating difficulties at the Shanghai Gigafactory.
China’s policy of rolling lockdowns as a reaction to isolated COVID-19 cases makes predicting future production mishaps a fool’s errand, as China just reinstated lockdowns in Shenzhen and other cities on August 30 as a result of their zero-COVID policy.
These rolling lockdowns tend to be short in nature in an effort to quash any cases that pop up. The primary risk factor is that cases grow fast in one region and China enforces more draconian measures.
Tesla gives out breadcrumbs regarding China production. They’ve been making regular updates about changes in their projected delivery times for cars sold in China. Just this week on Tuesday, August 30, the company slashed delivery times from 4-8 weeks to 1-4 weeks for their rear-wheel drive Model Y.
If we take Musk at his word, Tesla expects to produce 1.5 million vehicles by the end of 2022. And with only some 564,000 produced so far in 2022, the company has much ground to make up in the second half of the year, which would show up on the top and bottom line in the two upcoming earnings reports, on October 17 for Q3 and sometime in December for Q4.
Tesla is one of a few unique companies in the stock market which manages to trade almost entirely on investor sentiment, with little regard for valuation. In roughly twelve years as a public company, this is one of two things to remain unchanged: that the stock trades on sentiment and that volatility will be high.
Despite a rosy outlook for the second half of 2022, several threats present could threaten further progression.
Chief among them is a growing skepticism of the company in Washington, DC. Just in the last few weeks, two US Senators urged the National Highway Traffic Safety Administration (NHTSA) to investigate safety issues in Tesla vehicles.
Even more shocking is that the California DMV, home of Tesla and its avatar customer of affluent, environmentally-conscious consumers, is accusing the company of falsely advertising its Autopilot and Full-Self Driving features.
Bottom Line for Traders
There’s a slew of catalysts on the horizon that can potentially fuel a push back to 2022 highs. But the x-factor at play here is the litigation between Twitter and Musk. The potential for the trial consuming Musk’s attention and the possible waterfall of Tesla share sales from Musk make it difficult for bulls to sustain a healthy run with the uncertainty of the case looming.
In keeping the litigation top of mind, here are some catalyst other dates to keep in mind:
- Tesla AI Day: September 30
- Twitter v. Musk trial date: October 17
- Q3 Earnings Date: October 19
- EV tax credits come into effect for Tesla vehicles: January 1, 2023
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The Fund has derived all disclosures contained in this document regarding Tesla, Inc. from publicly available documents. In connection with the offering of the Fund’s securities, neither the Fund, the Trust, nor the Adviser or any of its respective affiliates has participated in the preparation of such documents. Neither the Fund, the Trust nor the Adviser or any of its respective affiliates makes any representation that such publicly available documents or any other publicly available information regarding Tesla, Inc. is accurate or complete. Furthermore, the Fund cannot give any assurance that all events occurring prior to the date hereof (including events that would affect the accuracy or completeness of the publicly available documents described above) that would affect the trading price of Tesla, Inc. have been publicly disclosed. Subsequent disclosure of any such events or the disclosure of or failure to disclose material future events concerning Tesla, Inc. could affect the value of the Fund’s investments with respect to Tesla, Inc. and therefore the value of the Fund.
TSLL/TSLS Specific Risks –– The trading price of TSLA has been highly volatile and could continue to be subject to wide fluctuations in response to various factors. The stock market in general, and the market for technology companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies.
Tesla Risk: The future growth and success of Tesla, Inc. are dependent upon consumers’ demand for electric vehicles, and specifically, its vehicles in an automotive industry that is generally competitive, cyclical and volatile. If the market for electric vehicles in general and Tesla, Inc. vehicles does not develop as Tesla, Inc. expects, develops more slowly than it expects, or if demand for its vehicles decreases in our markets or our vehicles compete with each other, the business, prospects, financial condition and operating results of Tesla, Inc. may be harmed. Tesla, Inc. may fail to meet its publicly announced guidelines or other expectations about its business, which could cause the price of TSLA to decline significantly.
Automotive Companies Risk. The automotive industry can be highly cyclical, and companies in the industry may suffer periodic operating losses. Automotive companies can be significantly affected by labor relations, fluctuating component prices and supplier disruptions. Additional risks include, for the Direxion Daily TSLA Bear 1X Shares, risks related to Shorting and Cash Transactions. Please see the summary and full prospectuses for a more complete description of these and other risks of the Funds.
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