Tesla stock has managed to stage a modest rebound this morning after reporting that, as Elon Musk leaked previously, it had produced just over 2,000 Model 3 cars in the last week, which while still well below the company's own prior guidance of 2,500/week (which in turn was 5,000/week before that), was better than the Street's worst estimates as low as the mid-1000's.
The bounce, however, is merely a dead cat according to JPMorgan's equity derivatives strategists, who write that TSLA shares "may be unable to escape a continued sell-off as a confluence of unfortunate events may seal its fate regardless of Q1 production results."
As a result of this fatalistic view, JPMorgan is recommending clients purchase TSLA June 100 strike puts for $2.01, indicatively ($252.48 reference price), as the bank believes "the market is underpricing TSLA tail risk."
Furthermore, as JPM's Shawn Quigg adds, "a shift in sentiment in both the equity and debt markets the past two weeks may have altered the reward-risk dynamic of the stock, making any debt refinancing potentially more difficult and more expensive, particularly when considering TSLA capex guidance."
JPMorgan lays out the following disturbing rationale for the crash short:
TSLA is down 19.5% over the past two weeks as a confluence of negative events weighs on sentiment ahead of its Q1 production results.
Factors weighing on the stock include growing concerns that Q1 production results could disappoint, both Uber and Tesla having fatal car accidents, NVDA and Toyota announcing the suspension of their autonomous driving programs,
Moody’s downgrading TSLA debt on concerns of lower than expected Q1 production results, and a broader weakness in Technology stocks. TSLA bonds are trading significantly lower following the Moody’s downgrade, as concerns mount about the company’s ability to grow its way out of future financial difficulty given its high cash burn, near-term debt maturities, heavy debt load and capex guidance.
Narrative aside, the far bigger risk to Tesla has always been its unprecedented cash flow, and JPM notes as much:
In 2018 we estimate TSLA will burn over $700M in adjusted free cash, in addition to having a $390M convertible bond coming due. In 2019, TSLA has nearly $1B in convertible bonds coming due alone. TSLA could reduce its cash burn by reducing capex, and also appears to have an option to pledge its Gigafactory in Nevada as collateral to secure future debt financing. However, continued equity weakness will make any convertible debt financing more difficult, more expensive and likely more dilutive to equity holders.
Thus, disappointing results could place considerable pressure on the stock as dilution fears exacerbate the weakness. Additionally, we see a scenario where better than expected results may also no longer be enough to keep bullish investors engaged as the reward-risk dynamic appears to have deteriorated.
Which brings us to JPM's striking conclusion: the Tesla "story" may be over:
... a continued stock decline could accelerate equity dilution concerns and create a self-feeding downward spiral in the stock, making our tail risk scenario plausible. J.P. Morgan Auto and Auto Parts analyst Ryan Brinkman is Underweight TSLA with a 2018 year-end price target of $190. Our model incorporates better than expected Model 3 Q1 production results (vs. Street expectations), but does not incorporate any type of equity dilution, thus a potential bear-case scenario could be significantly lower than our price target.
Finally, some more on the actual trade reco:
June options provide investors exposure to Q1 production results and the maturity of TSLA’s 2018 convertible bonds. June options imply an approximate 4% probability TSLA will close at/below $100 by June expiry. We believe this may be underpricing the likelihood of a tail event by June expiry.