Is Tesla in Trouble?

Musk's decision to cut 10% of his workforce drew a lot of attention. Markets reacted favourably to the reduced cost but cutting payroll is often the last resort for companies facing financial difficulties.

----------------

Getting a handle on the situation

Like most tech stocks, Tesla's shares are down significantly in 2022. They are down almost 40% since the start of the year. But unlike most companies, share prices have somewhat improved lately despite an internal memo from CEO Musk looking for a 10% reduction in headcount being leaked. Last week Musk also said that the new factories in Berlin and Texas were costing billions of dollars. But the stock price still managed to rise.

It seems the regular dynamics don't apply to Tesla, as has been seen extensively in recent years. The lockdowns in Shanghai have been causing the company headaches, as some components for the Berlin and Texas factories are being delayed (hence, the loss of billions, as mentioned by Musk). So, what keeps Tesla at bay?

Aside from managing its challenges, Tesla remains the leader in the fast-moving EV industry and its share price is cheaper than the average Dow stock based on its PEG ratio. It currently stands at 1.66, much lower than the previous 5yr expectation of 2.67. Naturally, analysts are hesitant to take too bearish a view on the stock and are unwilling to pull their support out of the stock as they remain optimistic about Tesla’s 5-year growth rate. Meanwhile, the firm is seeking to hire more production staff, even in the supposedly "loss-generating" Berlin factory.

But there are other issues on the horizon

Reportedly Japan is pushing to get the target of zero-emission vehicles to be dropped and this should impact the EV market. Officials have publicly said that the way forward to deal with high oil prices is to accelerate the transition to electric. However, privately, the increased push towards zero carbon has raised costs to produce the very components needed to produce the vehicles. China, in particular, is facing hurdles as it tries to reduce coal production but needs more electricity to supply its growing electric vehicle fleet.

Meanwhile, Tesla reportedly has suspended operations in its Shanghai plant to do upgrades that would increase car production. A full accounting of who will get the axe due to the 10% job cuts is naturally not available, but those who have made it public that they were let go were generally managers.

Tesla’s imminent breakout?

Tesla’s share price is trading in a narrow range between $620 and $790, where its upper side merges with the 50-day average. Above there, $915 is the 200-day average and where prices recorded all-time highs in January ’21. This makes the resistance less prone to breaking, but in the unlikely scenario, the next level up is the bearish trendline down the top. Inversely, $540 is major support. It is resistance-flipped-support and has managed to withhold selling pressure in two instances last year.

If CCI momentum wanes the divergence might be priced in already since the indicator is overbought. If, however, the bulls maintain a value above 80 (currently at 91), the relief rally could continue as we are officially in a bear market.

Source: Spreadex trading platform

Key takeaways

Tesla shares are down 40% in the year but they recently up despite internal memos and multifaceted challenges as investors remain positive about the stock’s prices relative to others.

With events in China and Japan affecting prices and jobs at Tesla, its share price could trade in a wide range, with the narrower expected to breakout soon.