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), then 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 its 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 Musk wants to build that hype past the breaking point.
Tesla has total revenue of $10.75 billion but EBITDA of less than $250 million, negative profit margins (across all its "businesses"), negative cash flow (big time), negative return on its equity, and a whopping $11.75 billion in debt (and counting). It burned through more than $1.15 billion in cash it borrowed in the junk-bond market over the summer, and it burned through even more last quarter.
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What it's doing to quell the nervousness over its cash burn is pulling forward revenue into current quarters to make itself look better. It's booking car payments immediately and delaying operating expense payouts more than 90 days in some cases.
It's 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. Its 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 Tesla's burning through it. But it has to sell more cars and trucks that it hasn't even built yet to get those leases.
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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 5,000 a week starting in 2018. Then they got knocked back to 2,500. 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 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 its 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 its goodwill without much to show for it. The market has been kind to it, but that doesn't last forever. In fact, no company is safe from a shrewd look at its metrics turning it from a darling into a dog.
Tesla, right now, is stumbling over reality in its run from the truth of its 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 its earnings or its 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 on how to play these situations for profit quickly, every week.
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 later this week, but for now? Go get 'em.
You can take down extraordinary gains when you understand how Wall Street really works. Shah's been on the inside, and in his free, twice-weekly Wall Street Insights & Indictments, he reveals how to trade the bigger picture for maximum returns. To get his insight and start beating the Street, just click here.
The post Tesla's Running on Fumes; Here's How You Trade It appeared first on Wall Street Insights & Indictments.
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.