Is It Midnight For This Cinderella Story?
Tesla (TSLA) has been one heck of a Cinderella story. After years of struggle, the electric carmaker began to fulfill the promise its eccentric CEO, Elon Musk, has been heralding. Up more than 400% in the last 9 months, the debate on whether the stock and the company are worth its valuation rages on.
For those wondering if now is a good time to get out of this trade, there are a few things to consider. First and foremost, Tesla just revealed plans to raise another $2 billion in capital via common stock offering, a move that will dilute shareholder value in a company that is, we think, on track to produce profits in the not-too-distant future.
Tesla Wants To Raise $2 Billion
The news, Tesla wants to raise $2 billion through an offering of common stock that could happen today. The funds will be used to strengthen the balance sheet and general corporate purposes. Elon Musk and board member Larry Elison, of Oracle (ORCL) fame, will both participate in the offering as a sign of their faith in the company.
Musk will purchase up to $10 million in shares, Elison up to $1 million, leaving a substantial amount for the market to soak up. At today’s prices, $2 billion is equal to roughly 2.703 million shares or about 1.6% of the float. Based on the 30-day average volume, that is roughly 2.5 days worth of trading. The underwriters of the offering, Goldman Sachs and Morgan Stanley, will share in a $300 million greenshoe option that will allow them to support prices once the offering is made.
Reaction to the offering is mixed. Where some investors are concerned the sale will dliute their holdings others are more sanguine. Why not take advantage of share prices while they are sitting near $800? Particularly if the move will shore up the balance sheet and smooth the way to profitability.
A New Risk Emerges
Simultaneous to the share-offering announcement, Tesla revealed a new subpoena from the SEC. The release includes some good news and bad news but it is the bad news investors are focusing on. The good news? The SEC and DOJ have close the investigation into Tesla’s public comments about Model 3 production numbers. The bad news is a new investigation into Tesla’s financial data and financing arrangements, a move that could pull the rug out from beneath this high-flying stock if irregularities are found.
The Technical Picture Is Bleak
It was just two weeks ago that shares of Tesla went parabolic. The trading momentum pushed the stock up to near $1000 but the gains weren’t held. This situation, with Tesla’s true value so hard to pin down, has put the stock at risk of a major reversal.
To start, the candle that formed during the push to $1000 is a Shooting Star. The Shooting Star is not always a guarantee of reversal but this one has three things going for it that support the bear case. First is the magnitude. This Shooting Star Doji is the largest candle on the chart, a 25% move in a single day, showing a high degree of market conviction.
Second is the volume. A Shooting Star on low volume is near meaningless but this one comes with the single largest volume day ever recorded. Another sign of market conviction, all those long-term holders recognized the move for what it was; a liquidity event, selling opportunity and chance to exit a risky growth-oriented stock with heavy exposure to China.
Finally, the Shooting Star was confirmed by follow-on price action. Share prices opened below the Shooting Star and fell from there, creating another bearish pattern, the Abandoned Baby.
Is It Time To Sell Tesla?
Answering the question, is it time to sell Tesla, depends on perspective. If you already own some and want to lock in those profits now is a great time to sell. The near-term outlook is bearish and I doubt we’ll see another price spike to $1000 very soon. If you already own the stock and are showing a loss, you should be prepared for volatility in the days and weeks ahead, if not lower share prices. The longer-term outlook is still bullish but it may take some time for the market to start moving higher again. If the share price does return to $1000 I will not be surprised if another selling event takes place.