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Chart of the Day / Why Tesla May be a Buy Opportunity

Why Tesla May be a Buy Opportunity

September 9, 2018

Tesla Inc. has been a slow-motion train wreck.

All thanks to un-CEO behavior from Elon Musk.

Shares of the stock plunged after video surfaced of him smoking pot on a podcast, capping a volatile month for the CEO.  That was in addition to resurfaced conflict with a British cave explorer, and Musk’s tweet that he was “considering taking Tesla private.”

The latter opened a can of worms with the U.S. SEC.

Matters got worse when the company revealed that Chief Accounting Officer, Dave Morton resigned over intense public attention.

“Since I joined Tesla on August 6, the level of public attention placed on the company, as well as the pace within the company, have exceeded my expectations,” Morton said, as quoted by CNBC. “As a result, this caused me to reconsider my future.”

Now, company HR chief Gaby Toledano is parting ways with the company, too. Even Vice President of Communications, Sarah O’Brien left.

Then Goldman Sachs reiterated its sell rating on the stock with a $210 price target.

All thanks to the company’s debt-riddled balance sheet and electric vehicle competition.

However, the company has managed to ramp up its Model 3 production, which could temporarily allow it to stop burning cash.  With that, analysts at Oppenheimer believe the company could meet its Model 3 production and profitability targets.

Therefore, the stock is a buy, they note.

The other good news – Tesla was “1st, 2nd& 3rdin August sales,” tweeted Elon Musk.

Still, there are doubts on sustainability of that free cash flow.

That’s because of mounting debt issues.  Net debt has just about doubled to $9.2 billion in a year.  About $7.5 billion of its debt will come due in the next four years.

And while Musk will tell you the company won’t need to raise more cash, there are skeptics.

Goldman Sachs believes Tesla will need to raise significant capital in 2019.

“While we see the potential for a better near-term backdrop with growth in Model 3 production/deliveries driving positive [free cash flow] in the second half of 2018, we believe this will likely not be sustained as working capital tailwinds abate and as spending ramps back up after a period of cash conservation,” as quoted by U.S. News.

Even Cowen believes it’ll need to raise $2 billion this quarter, which could be challenging with an SEC investigation.

It also appears that a good deal of negativity has been priced in.

While all seems lost, there may be opportunity.

Granted, the CEO has done some foolish things.  Executives are bailing.  Debt is piling up along with a US SEC investigation, but the pullback may be technically “baked” in.

Each time the stock has pulled back to its current price dating back to February 2017, it’s bounced back. If it can hold triple bottom support, we could see a near-term recovery.

In addition, the stock is now outside its lower Bollinger Band (2,20).  It’s also at a historic low on relative strength (RSI), MACD and Williams’ %R (W%R). Should it bounce from oversold conditions, we could potentially see a bearish gap refill around $340.

If it can’t hold support, we could potentially see a test of December 2016 support at $180.

As long as Musk doesn’t do anything else outrageous, there may be a chance for rebound.