Tesla’s Running on Fumes – Here’s How You Trade It

1 | By Shah Gilani

No, the market’s not going to fall out of bed.

There are just too many good stocks with strong earnings growth, ringing up huge profits with lots of momentum behind them, driving all the major benchmarks higher.

Then there’s Tesla Inc. (NASDAQ:TSLA).

Sure, it’s considered a tech darling. But it’s not. In reality, it’s a car company jumbled in with a solar panel company and a battery company, masquerading as one unified tech company.

Sure, it’s considered a market darling. But it’s not. Tesla’s stock is stuck in the mud and going sideways.

Sure, it’s got earnings growth. But these aren’t “real” earnings – they’re engineered earnings.

The market has strong underpinnings, enough to weather any serious rounds of profit-taking. Tesla, on the other hand, has no profits to hold it up. If the market dips (especially if tech stocks dip on profit-taking), Tesla’s profitless and sideways stock is headed lower.

Even if the market continues higher, Tesla’s going to have to face reality over its Q4 earnings.

If they come out at the end of February and aren’t a huge upside surprise (and they won’t be), if earnings are below consensus estimates (which they will be), and if they’re burning through more cash than they’re already spending (which has already happened), the stock is going to keel over and shake Elon Musk groupies to their core.

Here’s how smoke and mirrors have transformed a lackluster company into a tech darling, and exactly how to trade Tesla’s fall when their luck runs out…

Tesla’s Basic Metrics Are Awful

Over-hyped Tesla has a market cap of $58 billion. That’s a lot of hype.

This “genius” company is essentially a car company that everyone believes is all these other companies rolled into one giant tech juggernaut. And it is, but only because Elon Mush wants to build that hype past the breaking point.

Tesla has total revenues of $10.75 billion, but EBITDA of less than $250 million and negative profit margins (across all their “businesses”), negative cash flow (BIGTIME), negative return on its equity, and a whopping $11.75 billion in debt (and counting). They burned through more than $1.15 billion in cash it borrowed in the junk bond market over the summer, and they burned through even more last quarter.

What they’re doing to quell the nervousness over their cash burn is they’re pulling forward revenue into current quarters to make themselves look better. They’re booking car payments immediately and delaying operating expense payouts more than 90 days in some cases.

They’ve even gone the ABS (asset-backed securities) route, setting up the Tesla Auto Lease Trust’s initial 2018 A-Series ABS offering of pools of commercial and personal closed-end leases of the cars, crossovers, and trucks they lease. Their underwriters will be Citigroup, Deutsche Bank, and Bank of America Merrill Lynch.

Translated, that’s all about packaging leases to sell to institutional investors to get cash because they’re burning through it. But they’ve got to sell more cars and trucks that they haven’t even built yet to get leases those.

Model 3 Smoke and Mirrors

The Model 3, the company’s supposedly mid-priced auto (starting at $35,000) is coming off the production line like molasses.

Production estimates for the Model 3 were initially 5000 a week starting in 2018. Then, they got knocked back to 2500. They’re nowhere close to that as we enter February. Then there’s the reality that a lot of the cars rolling out of Tesla facilities have all kinds of “factory defects” that must be fixed before they’re shipped out.

These “production bottlenecks” and post-production issues are a holding up everything.

Expectations for Tesla’s cash flow crunch to be alleviated are entirely predicated on production and sales of the Model 3.

Of the 400,000 “pre-orders” the company’s hyped, how many will rescind their interest and demand their down payments back? If the number of sales lost starts to ramp up as other manufacturers start infringing on Tesla’s once sacred ground, the prospects for cash flow will evaporate.

If the company’s cash flow problems can’t be met by what’s supposed to be organic growth, the bond market will start charging Tesla more and more, and credit default swap prices will start rising.

Profit from Elon’s Broken Promises

Don’t get me wrong; I love Tesla cars. I’m just not a fan of all the smoke and mirrors Elon Musk throws up to mask the monster cash flow struggles he is having.

What I do like about Tesla right now are the TSLA April 20, 2018 $290 puts (TSLA180420P00290000) for around $7.50.

If Tesla disappoints at the end of February on their earnings numbers, especially on production and lease numbers for the Model 3, investors are going to take what profits they have and head home.

After that, the stock could easily break the $300 support level that’s so important to hold it up. That is exactly why I like those $290 puts; when TSLA breaks below its $300 support, it could drop another 10% in a day.

It’s crazy to me just how long Tesla has been riding their goodwill without much to show for it. The market has been kind to them, but that doesn’t last forever. In fact, no company is safe from a shrewd look at their metrics turning them from a darling into a dog.

Tesla, right now, is stumbling over reality in their run from the truth of their situation. A perfect storm is brewing, and we are getting into position right before it catches up with them.

These situations are exactly what I hunt for, week after week. When a company that has been coasting for too long is about to crash on the rocks of their earnings or their broken promises, I want you to know how to be in position and ready to profit.

I will always write here about what I see coming on the horizon, but often these plays tee up quickly and require an advanced system so I can alert the few members I want to share these opportunities with. If you haven’t already checked out Zenith Trading Circle, that is where the people who are ready for these kinds of trade opportunities get my alerts quickly, every week, on how to play these situations for profit.

And I mean serious profits. Just this month, we closed two triple-digit gains on a merger play that my Zenith members had the opportunity to hold for about a month.

This TSLA trade is just a taste. What I do in Zenith is no joke, which is why I’m not joking when I say that if you’re ready then now is the time. I have a new trade recommendation coming down the pike in the next couple of days, and you’ll want to be ready as soon as possible.

I’ll be back here on Friday, but for now?

Go get ’em.



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