Yesterday, Goldman Sachs analyst Mark Delaney joined Barclays and Morgan Stanley in downgrading the rating of TSLA from Buy to Neutral/Hold, followed by a decrease of just over 6% in the EV maker's share price. The Bloomberg analyst recommendation consensus graph, where sell = 1 & buy = 5, has declined approx. 0.2 points to 3.45 in the past week. Wall Street Journal quotes an average price target of $207.
So why are analysts lowering their price targets?
Fundamentals:
TSLA closed at $256.60 on Friday, representing more than a 130% yearly increase. In the 36 days before the local high on June 21st, the stock gained 69%. This was mainly due to its strong positioning within the AI market. Tesla vehicles collect a massive amount of data, and feed this data through a neural network, which is a deep learning (type of machine learning) algorithm that can process large volumes of data and improve its own accuracy over time. As new developments surface in the AI and ML space, TSLA will be uniquely positioned to take advantage of these developments to create tangible value. For example, their self-navigation and self-driving features in their cars heavily rely on algorithms and voluminous data in which AI and ML algorithms are foundational.
However, in early June TSLA was valued at a forward Price/Earnings ratio of 61, compared with Wall Street AI darling NVDA at 42 after they announced an earnings and revenue beat of 18% and 10%, respectively. TSLA was valued higher than the "only arms dealer" in the AI war, the chipmaker that most generative models are built on. Many believe the AI prospects for Tesla have already been priced into its shares, meaning any further extension are more likely a reflection of Keynes "Castles in the Air" theory of market psychology, or retail participants entering the bull market too close to expiration.
Tesla has a growing demand problem (or perhaps a lack thereof). In Q1 2022, the EV maker sold approx. 5,000 more vehicles than it produced. In Q1 2023, it built 18,000 more than it could sell. This could be added to the 56,000 unsold EVs reported at the end of 2022. 422,875 deliveries in Q1 of this year is an increase of about 36% YoY, but price cuts eating a portion of their margins are not producing the desired affect on demand. A model Y is ~ $11,000 cheaper today than at the start of the year.
DCF Valuation puts the company $73.7 USD, overvalued by 75%. Relative valuation against competitors such as Toyota, Porsche, BYD co., Mercedez-Benz, values Tesla at $47.41, with 80% downside. The Price to Free Cash Flow to Equity ratio (P/FCFE) rests at 136, compared with a historical average of 41 and an industry average of 1. The P/E is also above its historical and industry averages of 45 and 9, respectively.
Together, these fundamentals paint the picture of a company ripe for a correction of at least 10% due to faltering internal economics and the tendency of the current market to overvalue AI positioned stocks.
Macroeconomics:
Fed Chair Jerome Powell told the Senate Banking Committee last Thursday he expects one or two more rate hikes in the following 6 months to maintain the goal of 2% inflation (currently 4.05%). The yield curve is inverted, with 10y interest rates at 3.72 and 3m at 5.5, which has indicated recessions in the past. Total employment grew by a strong 339,000 jobs in May over diverse industries, but combined with the hawkish Fed, decreased government spending due to debt ceiling deal, and bearish trends in consumer spending and income, it is likely real GDP growth will slow to 1% in 2023. Tech-heavy Nasdaq closed on Thursday with a 40% yearly gain, while the broad S&P 500 logged a modest 16%. In light of the macroeconomic circumstances, TSLA's 130% gain is largely disproportional.
Technicals
Regarding chart patterns, TSLA has formed a clear head and shoulders pattern on the daily chart with a break in the neckline at about $248. As support and resistance goes, breaking the crucial level of $250 and closing below, as occurred on Monday, is a bearish signal.
As volume analysis goes, the prior two days have seen increasing sell orders and Friday's close saw the first red volume bar on the weekly since early May. A fixed range volume profile of 2023 shows an upper value area of $211, in confluence with the 0.382 Fibonacci retracement level. The point of control is at $198, in the range of confluence with the 200 & 100 EMAs and the .5 retracement level representing support / supply zone. These all represent areas price is likely to draw towards in accordance with mean reversion and liquidity analysis.
The MACD histogram flipped bearish and the slow and fast lines crossed over, also a bearish indicator, and the daily RSI crossed below 70 on Friday.
Shifting to intraday (1h) timeframe, the volume supported linear regression trend is strong bearish at -20, the Laguerre RSI is printing a decreasing trend continuation. The short term 3 period hourly non-repainting Nadaraya-Watson Rational Kernal Regression line is bearish and is acting as support for any bearish entry, while the envelope shows a lower bound estimate of $218 and the longer period 50 candle regression line on the daily is 20 points lower than price action, leaving plenty of room for a correction. A combination of 30 technical indicators used as inputs in a neural network algorithm show bearish trend continuation. The Lorentzian Distance Classification Machine Learning KNN algorithm, which compensates for the warping of price-time around news events, is indicating a strong bearish trend. The stochastic momentum index saw a bearish flip on Thursday and the money flow index of the stochastic momentum index is already in a strong bearish trend.
For fans of Tom DeMark, the TD Sequential / Countdown strategy saw a bearish signal printed on June 16th as the 13th day to close higher than 2 candles before (countdown), after the 9th candle in a row closed higher than 4 candles previous (sequential). This is an anti-momentum indicator used to predict explosive bearish corrections as a result of an overextended bull market.
Conclusion
It is likely based on the combination of fundamentals, technicals, and macroeconomic factors that TSLA will experience an additional correction of at least 12%, in addition to the 13% decrease it has experienced from the local high, for a total minimum 25% correction from the bull rally. I will be opening September puts with a stop loss above the recent swing high, and a profit target at the daily VPOC 0.382 retracement level (approx. $210) for a 2:1 RRR. I will adjust SL to B/E at 1:1 RRR, and dynamically adjust profit target if the neural network and Lorentzian classification both indicate a bullish reversal.
Sources
www.conference-board...research/us-forecast
www.alphaspread.com/...-valuation/base-case
www.bloomberg.com/ne...et-inflation-to-goal
www.bloomberg.c...dy-markets-wrap?srnd=marke...
www.bloomberg.com/ne...sla-tsla-stock-rally
ir.tesla.com/press-r...t-first-quarter-2023
!! IMPORTANT DISCLAIMER !!
I am not a licensed financial advisor, and the trading ideas I provide do not constitute investment advice. Please exercise caution and consult with a qualified professional before making any investment decisions. Trading in financial markets involves substantial risks, and you should carefully consider your financial situation and risk tolerance before engaging in any trading activities.
Please note that any information or suggestions I offer are purely for educational and informational purposes. The financial markets are volatile and unpredictable, and past performance is not indicative of future results. It is essential to conduct thorough research, analyze market conditions, and seek guidance from licensed professionals who can provide personalized advice tailored to your specific circumstances.
I strongly recommend that you consult with a licensed financial advisor, accountant, or legal professional regarding your investment goals, strategies, and potential risks. They can provide expert guidance based on your individual financial situation, objectives, and risk tolerance.
Remember, you are solely responsible for your investment decisions, and any losses incurred are at your own risk. I disclaim any liability or responsibility for any direct or indirect damages or losses arising from your reliance on the information provided.
Always stay informed, exercise sound judgment, and consider multiple sources of information before making any financial decisions.
So why are analysts lowering their price targets?
Fundamentals:
TSLA closed at $256.60 on Friday, representing more than a 130% yearly increase. In the 36 days before the local high on June 21st, the stock gained 69%. This was mainly due to its strong positioning within the AI market. Tesla vehicles collect a massive amount of data, and feed this data through a neural network, which is a deep learning (type of machine learning) algorithm that can process large volumes of data and improve its own accuracy over time. As new developments surface in the AI and ML space, TSLA will be uniquely positioned to take advantage of these developments to create tangible value. For example, their self-navigation and self-driving features in their cars heavily rely on algorithms and voluminous data in which AI and ML algorithms are foundational.
However, in early June TSLA was valued at a forward Price/Earnings ratio of 61, compared with Wall Street AI darling NVDA at 42 after they announced an earnings and revenue beat of 18% and 10%, respectively. TSLA was valued higher than the "only arms dealer" in the AI war, the chipmaker that most generative models are built on. Many believe the AI prospects for Tesla have already been priced into its shares, meaning any further extension are more likely a reflection of Keynes "Castles in the Air" theory of market psychology, or retail participants entering the bull market too close to expiration.
Tesla has a growing demand problem (or perhaps a lack thereof). In Q1 2022, the EV maker sold approx. 5,000 more vehicles than it produced. In Q1 2023, it built 18,000 more than it could sell. This could be added to the 56,000 unsold EVs reported at the end of 2022. 422,875 deliveries in Q1 of this year is an increase of about 36% YoY, but price cuts eating a portion of their margins are not producing the desired affect on demand. A model Y is ~ $11,000 cheaper today than at the start of the year.
DCF Valuation puts the company $73.7 USD, overvalued by 75%. Relative valuation against competitors such as Toyota, Porsche, BYD co., Mercedez-Benz, values Tesla at $47.41, with 80% downside. The Price to Free Cash Flow to Equity ratio (P/FCFE) rests at 136, compared with a historical average of 41 and an industry average of 1. The P/E is also above its historical and industry averages of 45 and 9, respectively.
Together, these fundamentals paint the picture of a company ripe for a correction of at least 10% due to faltering internal economics and the tendency of the current market to overvalue AI positioned stocks.
Macroeconomics:
Fed Chair Jerome Powell told the Senate Banking Committee last Thursday he expects one or two more rate hikes in the following 6 months to maintain the goal of 2% inflation (currently 4.05%). The yield curve is inverted, with 10y interest rates at 3.72 and 3m at 5.5, which has indicated recessions in the past. Total employment grew by a strong 339,000 jobs in May over diverse industries, but combined with the hawkish Fed, decreased government spending due to debt ceiling deal, and bearish trends in consumer spending and income, it is likely real GDP growth will slow to 1% in 2023. Tech-heavy Nasdaq closed on Thursday with a 40% yearly gain, while the broad S&P 500 logged a modest 16%. In light of the macroeconomic circumstances, TSLA's 130% gain is largely disproportional.
Technicals
Regarding chart patterns, TSLA has formed a clear head and shoulders pattern on the daily chart with a break in the neckline at about $248. As support and resistance goes, breaking the crucial level of $250 and closing below, as occurred on Monday, is a bearish signal.
As volume analysis goes, the prior two days have seen increasing sell orders and Friday's close saw the first red volume bar on the weekly since early May. A fixed range volume profile of 2023 shows an upper value area of $211, in confluence with the 0.382 Fibonacci retracement level. The point of control is at $198, in the range of confluence with the 200 & 100 EMAs and the .5 retracement level representing support / supply zone. These all represent areas price is likely to draw towards in accordance with mean reversion and liquidity analysis.
The MACD histogram flipped bearish and the slow and fast lines crossed over, also a bearish indicator, and the daily RSI crossed below 70 on Friday.
Shifting to intraday (1h) timeframe, the volume supported linear regression trend is strong bearish at -20, the Laguerre RSI is printing a decreasing trend continuation. The short term 3 period hourly non-repainting Nadaraya-Watson Rational Kernal Regression line is bearish and is acting as support for any bearish entry, while the envelope shows a lower bound estimate of $218 and the longer period 50 candle regression line on the daily is 20 points lower than price action, leaving plenty of room for a correction. A combination of 30 technical indicators used as inputs in a neural network algorithm show bearish trend continuation. The Lorentzian Distance Classification Machine Learning KNN algorithm, which compensates for the warping of price-time around news events, is indicating a strong bearish trend. The stochastic momentum index saw a bearish flip on Thursday and the money flow index of the stochastic momentum index is already in a strong bearish trend.
For fans of Tom DeMark, the TD Sequential / Countdown strategy saw a bearish signal printed on June 16th as the 13th day to close higher than 2 candles before (countdown), after the 9th candle in a row closed higher than 4 candles previous (sequential). This is an anti-momentum indicator used to predict explosive bearish corrections as a result of an overextended bull market.
Conclusion
It is likely based on the combination of fundamentals, technicals, and macroeconomic factors that TSLA will experience an additional correction of at least 12%, in addition to the 13% decrease it has experienced from the local high, for a total minimum 25% correction from the bull rally. I will be opening September puts with a stop loss above the recent swing high, and a profit target at the daily VPOC 0.382 retracement level (approx. $210) for a 2:1 RRR. I will adjust SL to B/E at 1:1 RRR, and dynamically adjust profit target if the neural network and Lorentzian classification both indicate a bullish reversal.
Sources
www.conference-board...research/us-forecast
www.alphaspread.com/...-valuation/base-case
www.bloomberg.com/ne...et-inflation-to-goal
www.bloomberg.c...dy-markets-wrap?srnd=marke...
www.bloomberg.com/ne...sla-tsla-stock-rally
ir.tesla.com/press-r...t-first-quarter-2023
!! IMPORTANT DISCLAIMER !!
I am not a licensed financial advisor, and the trading ideas I provide do not constitute investment advice. Please exercise caution and consult with a qualified professional before making any investment decisions. Trading in financial markets involves substantial risks, and you should carefully consider your financial situation and risk tolerance before engaging in any trading activities.
Please note that any information or suggestions I offer are purely for educational and informational purposes. The financial markets are volatile and unpredictable, and past performance is not indicative of future results. It is essential to conduct thorough research, analyze market conditions, and seek guidance from licensed professionals who can provide personalized advice tailored to your specific circumstances.
I strongly recommend that you consult with a licensed financial advisor, accountant, or legal professional regarding your investment goals, strategies, and potential risks. They can provide expert guidance based on your individual financial situation, objectives, and risk tolerance.
Remember, you are solely responsible for your investment decisions, and any losses incurred are at your own risk. I disclaim any liability or responsibility for any direct or indirect damages or losses arising from your reliance on the information provided.
Always stay informed, exercise sound judgment, and consider multiple sources of information before making any financial decisions.