The end is coming?

It has been the Street darling for many years and it can keep alluring people to get in regardless how fundamentally not justifiable. But the big question right now is if the company is on the verge of crash or even ending? I’m talking about Tesla (TSLA). I may be offending many Tesla lovers here by talking about the end of it but I have to be honest with you regarding what I’m thinking. Fundamentally Tesla is indeed in a big trouble as each day passing.

You may recall that not long ago, I was even making a technical bullish case for Tesla for a potential bull flag breakout although I have never been a fan of Tesla from the fundamental perspective. As I said, it was trading within a very large flag range between $300 to $360 and purely from the technical point of view, it could be very bullish if breaking out through its up end beyond $360 and if so, it could easily shoot up another 100 points in the following weeks or months. But if it breaks down through the support around $300, then the bull flag game is negated and it would be ugly for Tesla. Right now we are definitely seeing the worst case scenario for Tesla, which has been trading as low as $250. Technically it is an ugly outlook but what should really concern all the Tesla bulls about is its fundamental challenges that may kill Tesla. There are two major fundamental issues Tesla is facing:

• While Tesla has been in the leadership role in the EV market, the reality is that almost all the major car makers are developing their EVs. So the competition is becoming more and more ferocious and intensifying each day. This of course is not good news for Tesla when it desperately needs to maintain its market shares to generate enough money for survival.  
• More problematic is its current financial situation that is really dire and dangerous. As I said before, Tesla has no way to make enough money to run its business and it has to burn money continuously. The key for its life is having access to solid financing. Right now, Tesla is burning $3.5 billion each year and currently only has $3.4 billion cash on hand. It has another close to $1 Billion debt that is coming due soon. When a company is generating healthy cash flow from its business, it usually has no problems to get loans even if its business is losing money overall, as long as there is no risk for the company to service the loan by paying the interests on time. But if this prospect is under question, the creditors will get nervous and will first request for higher interests for the increased risk or even run away by refusing to provide the loan. So tell you one important trick in investing: if a company’s stock is crashing but its bond price is still doing well, it is usually indicative of a short-term temporary issue for the company, not a fundamental problem. But if a company’s bond price starts to fall sharply, it often means there are some significant fundamental problems for the company that may not be fixed easily, especially in a short term. Tesla is facing such a dangerous reality: Moody has just downgraded Tesla’s overall rating to B3, six levels below investment-grade – and gave the company a negative outlook. In addition, Moody recently slashed the rating for a Tesla’s debt worth $1.8 Billion to Caa1, which is the junkiest of the junk-bonds. In other words, Tesla is really facing a life or death situation and the bond market has already reflected this danger. See this Forbes’ report:  Tesla's Bonds Are In Freefall As The Financial Noose Tightens; Musk Needs To Sell Stock Now.

So what choices Musk has for now? Only two that I can think about: he either pays higher interests to renew his loan which he can hardly afford now or he has to issue new shares to get more money from dumb investors. The latter is probably more likely at the moment and it will mean a significant dilution of the existing shares that will dampen the stock price further when this happens. I personally will definitely not put my money into Tesla for any long term purposes as I think there is a real likelihood that Tesla may not even survive this year. Of course, I could be totally wrong as Musk has demonstrated that he indeed has some unique magic that can always calm down the fears of investors during crisis and can still walk away with the money he wants to kick the can further down the road. But I don’t want to bet on this for myself! Technically Tesla is quite oversold short term and it won’t surprise me to see it bounce back towards the overhead resistance around $290. But I think we may start to see another freefall if it gets there and good luck for Tesla and Musk regarding how low it can go.