An update on Tesla: Tesla is paramount to the stability of QQQ, Semiconductors, and Tech

Continued coverage for this key retail name during moments of exceptionally vicious volatility.

Note: This is a brief strategy update note on Tesla. While this note is outside of our usual Bi-Weekly report schedule, I will do what it takes to keep our members updated with the changing landscape. I know how stressful this environment can be, and will keep you posted.

If you’re new to my Community, please read my previous posts & research leading up to this one for context.

---

The face off in the TSLA Bulls vs. Bear camp has reached a tipping point.

Members,

I hope everyone is having a good holiday season. Christmas this year has a different vibe than previous years, especially if you’re a tech investor. I’m going to keep it real.

My next formal strategy report on U.S. and China markets will be released in early January, shortly after the New Year.

In the meantime, I want to continue providing you thoughtful coverage of a key retail name that is widely held by the retail investor community: Tesla.

First, a couple observations I want to make.

• Tesla and Apple are two of the most heavily owned stocks by retail investors.

• Tesla is estimated to be roughly 10% of an average retail portfolio, according to data vendors

As a result, I believe that the mood of the average investor in the market isn’t necessarily dictated by just index performance, but also these key single name company performances. Research from data vendors show that self-directed accounts don’t usually allocate as much capital in index funds, and more so in single-name companies.

My way of running our Community here is to do my best to keep you updated on the current landscape. When things are calm and stable, I can let ideas play out in the background.

When the landscape is moving in an adverse direction on key names that I cover, I’ll provide you more frequent updates.

I want to now review some updated observations on Tesla. Given that most of you are still in holiday mode, I’ll make this note as brief as possible.

This way, you can get the most up-to-date info and at the same time still spend what’s left of 2022 with your loved ones.

If you’re sidelined (not in) on Tesla, I think this name is not suitable for a buy & hold investor. It’s a trading vehicle. Seek other opportunities for stability, which I will provide coverage on as we enter the new year.

If you’re short in Tesla, congratulations on being part of the crowd where you found the best trade of 2022.

If you’re long in Tesla, hang in there. Here are my updates. This will be most valuable for investors who have either direct or indirect exposure to Tesla and find today’s tech environment to be unbelievably uncertain.

I’ve included references to the magnitude of Tesla’s selloff to other parallel events for you as well.

Before I get started, the reason I believe Tesla is critically important to tech investors is that core companies in Semiconductors are directly associated with TSLA. Renewed weakness or strength in TSLA will affect these other holdings as well.

TSLA represents the end consumer market, and Semiconductors (SOXX) represents the supply chain of the entire ecosystem. Together, TSLA and SOXX drive much of the Nasdaq’s (QQQ) day to day action.

Until TSLA stabilizes, I view QQQ to be in a quagmire. At the end of this note, I’ll offer up what I believe could be a silver lining for markets with Tesla’s latest impact on sentiment.

Given that TSLA is one of the top holdings for retail investors, I thought extra updates on TSLA may be appreciated.

So let’s get into it.

First, the latest updates.

Over the weekend, there are reports that Tesla will be running at a reduced production schedule at their Shanghai Gigafactory.

Given that China is a critical market for TSLA, this will impact the near-term fundamental story for Tesla. Along with the recent EV price cuts, the Buyside is adjusting what EBITDA margins could be for Tesla. EBITDA margins are among the most sensitive input in Wall Street valuation models.

Changing the EBITDA margins by just a few percentage points can swing the terminal (end) value dramatically.

On social media, I’ve assessed the sentiment. I would say that the sentiment towards Tesla is quite pessimistic.

The typical bear-case target on Tesla that I see is the $60 region.

Anything is possible in markets, and I’ll keep an open mind to that worst-case scenario.

But my base case is that we will see a bounce first.

Despite the intense negativity, I do believe it’s possible Tesla revisits 125-140 in the coming 4-6 months if the following areas below are met.

That said, this bounce is not to be bought for a safe buy & hold position. Rather it’s an opportunity to reduce.

With the dramatic headlines dominating the name every day, my entry in Tesla was too early, even after a 60% selloff in shares at 125-135 entered using cash-secured puts at the bottom end of the Weekly Demand Zone. I chose the most conservative way to enter an equity position, yet this selloff has spared no long-oriented investor - myself included.

I view my cost-basis to be quite favorable over the long-term. With an 18 month holding period, this is a good level.

But over the near-term, I have now mentally adjusted for the fact that I will be underwater on this position for quite some time.

From a fundamental standpoint, Tesla gives me very little opportunity to share any bullish narratives other than things that “could improve” in the future - such as Deliveries coming ahead of expectations or Elon making a statement to boost shareholder sentiment.

As negative headlines come in almost every day on the name, the bear cases are materializing. But at ~22x forward p/e on a previously hyper-growth company how much negativity is priced in?

While there are numerous ways to construct bull cases, I think the focus points for the name comes down to a few areas:

• Elon has been releasing a lot of politically sensitive information known as the Twitter Files. I think that him releasing such classified information is going to hurt his relationship with those in power. After all, the rules of the EV tax credits that benefit Tesla are written by the same people who he’s been calling out on the Twitter files. I believe Elon’s actions on Twitter are raising the “Market Risk Premium” for TSLA.

• There is potentially a Twitter CEO Announcement in the coming months. That could be a good sign that produces a recovery.

• Tesla January Earnings and Delivery Figures. Estimates are coming down, but Tesla China is a wild card.

• China’s Covid Situation and Impact on Production. This is something to monitor as it gives clues on EV demand.

From a fundamental standpoint, there is little to write home about in regards to Tesla’s outlook. Challenges are large, and at the moment, we lack “macro support.”

But from a selling intensity standpoint, Tesla’s collapse rivals the following historical events now with its Weekly RSI at 27:

• AMD trading for roughly $1 back in 2015 (Weekly RSI 27) and at 58 in October 2022 (Weekly RSI 32)

• BABA during the moments of unbelievable stress in March 2022 and October 2022 (Post 20th Party Congress) - Weekly RSI 30 in both instances

• BTC when during the December 2018 selloff all the way to 3K/BTC (Weekly RSI 30)

• QQQ Covid 2020 Crash (Weekly RSI 30)

• NVDA as it tested 110 in October 2022 (Weekly RSI 30)

With a long enough timeframe, those moments did end up seeing light at the end of a very dark tunnel.

Now the Weekly RSI is NOT a magical signal that doesn’t come without fake-out instances.

In a separate study that I did of whether Weekly RSIs led to lower lows across different stocks/ETFs, the answer is that “yes, sometimes lower lows were followed after a Weekly RSI 30 print.”

What this means is that any TSLA bounce is contextual and does not mean that an ultimate bottom has formed.

My guidance is the following:

• Camp 1: Investors who are not in TSLA should mostly avoid this name. The danger in this name is substantial. Rewards are high, but the psychological intensity of holding a TSLA position is equally as intense as a BTC selloff or BABA selloff.

• Camp 2: Investors who are long Tesla should hold. It rarely makes sense to sell/trim/reduce with the selling pressure so high, as it could lighten at any moment. Reduction should generally be done on bounces and not in panic selloffs.

• Camp 3: Investors who are short, well, are in the favorable position of having the leverage at the moment. They have the ultimate flexibility here.

I do believe that we are approaching levels of panic-selling in TSLA.

What I’ve found over time is that the best risk-adjusted thing to do when the level of fear is this high is to simply do nothing, extend your timeframe, and not add to the position (catch a falling knife).

Earlier in this note, I mentioned that this selloff in TSLA has silver linings for the market.

My thinking is that the froth in the market is coming off fast. TSLA now sells for around 21-23 forward P/E.

This means that the severe beating of key tech names Apple and TSLA in this Christmas holiday season has potentially truncated the tail risk downside for the broader indices.

In other words, with Apple, Tesla, NVDA, Google, and Amazon nearing pricing for a recession, the massive de-rating of these names means that we will need to see Health Care and Energy suffer dramatic set backs for the S&P 500 to see far lower lows than the 3500 region we’ve seen this year.

I’m not sure Health Care and Energy will get damaged the same way tech has been.

So in some ways, the damage done to tech in December 2022 (although extremely unpleasant) could potentially lead to a somewhat more stable 2023 (or at least one where the downside isn’t as extreme) for QQQ.

These are my preliminary thoughts, and I’ll update you all when further facts come into the picture.

That’s it for now.

I’ll call Santa tonight. Let’s see if he picks up. Or if he sends me to voicemail.

Stay Safe,

Larry