Can This Former Magnificent 7 Stock Come Back Even Stronger?

  • Stock Market Analysis

High Technology and Trade Barriers

It's no secret that Tesla (NASDAQ: TSLA ) is one of the most polarizing stocks out there and for good reason. The brains behind the electric vehicle giant, Elon Musk, has been praised as much as he's been criticized over the past half a decade. The South-African born entrepreneur and tech savant has multiple successful companies under his belt. Tesla happens to be the only publicly traded company he leads and as such is exceptionally volatile. How did it lose its 'magnificent' status and is there a path forward for the American EV darling? Keep reading.
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A Fall From Grace

Recent history remembers the collective label for the largest and most powerful group of tech companies in the world – the Magnificent 7. That designation was somewhat short-lived though. As sometimes happens, one or more of the members of the bunch will inevitably fall short of expectation and become expelled from the 'club'.

Such is the fate of Tesla, the California-founded and Texas-based trailblazing Electric Vehicle manufacturer.

The tail-end of 2019 marked the start of a near-exponential growth spurt in Tesla's stock price after hovering around $20 a pop for almost the entire duration after its IPO in 2010.

That was a monumental moment for the entire equities market as EVs became the talk of town and Tesla - the ultimate growth stock.

Tesla underwent a turbulent period between 2021 and 2023, during which its share price experienced substantial volatility.

After hitting a multi-year low at just over $100 per share, setting the stock back to 2020 levels, Tesla got a second wind from recuperating chip supply chains and breakthrough innovations in AI. The latter of the two is a cornerstone selling point in their product offerings (think autopilot).

Tesla made its way into the headlines once again, representing automotive in the technological sector megacap stocks.

The rally for them was cut short as the original hype around Artificial Intelligence dissipated to reveal the same domestic roadblocks as before – friction from regulators and consumer demand shifts.

Even more telling is their report for 2024's first quarter ending March 31. Coming off of strong sales for the whole of last year, Tesla took a dip in revenues compared to the same quarter of the year prior. Automotive sales were down $2.4 billion, and net profits dropped by more than half.

This naturally tanked their Earnings Per Share to a mere $0.34 compared to $0.73 in March 2023.

While Tesla doesn't publish geographical region sales in their quarterly reports, there is evidence to suggest that numbers in Central Asia could be down substantially, as their annual report suggests foreign EV competition as a key risk factor for their business.

Tesla S. Photo Courtesy of Tesla, Inc. https://www.tesla.com/


The Outside Threat

The US has had a negative trade balance with China since the first report in 1985 by the US Census Bureau, meaning they have been importing from more than exporting to them. The country has been relying on the cheaper outsourced labor for the manufacturing of many product groups – mainly consumer electronics.

Ongoing geopolitical tensions in the area and the generally precarious relationship between the two superpowers have gotten progressively delicate. This is in part due to the strategic position of China as a global exporter. Their technological advancements are allowing them to compete in the luxury and premium product markets with established Western companies that simply do not have the same economies of scale.

This is leading to higher competition in European and North American markets, where incumbents are ceding market shares to the encroaching Chinese rivals.

How the US Is Handling It

The US has taken a definitive stance on microchip technology, preventing US fabricators such as Intel (NASDAQ: INTC ) and Qualcomm (NASDAQ: QCOM ) from exporting some high-tech developments to China.

This is happening simultaneously as the Chinese government is ramping up subsidies to domestic technological companies, essentially allowing them to undercut market prices for automobiles and mobile devices abroad.

President Biden's administration imposed a tariff on roughly $18 billion worth of Chinese imports as a response. These measures apply to key tech resources such as metals, transistors, batteries, and the EVs themselves.

The world's growing dependence on Taiwan's production of chips has prompted multiple large cloud service providers—also known as hyperscalers—such as Amazon (NASDAQ: AMZN ), Microsoft (NASDAQ: MSFT ), and Google (NASDAQ: GOOGL ) to onshore their production and integrate their supply chain vertically backwards.

Repercussions of Protectionism

The US and China are no strangers to trade wars, but this one might become a little bit more strung out. That is, until the US feels secure enough that foreign imports are not undercutting their own industry and that its own production capabilities are up to par.

We need only look back to 2016 when the US erected similar protectionist policies, which were aimed at strengthening their businesses and their currency.

While incentivized local shopping can improve the national Gross Domestic Product due to lower imports, it can also harm the average consumer. As production is reshored, costs rise due to higher labor and material costs. Those are then transferred to the final consumer. Additionally, the decreased competition leads to fewer choices, and potential oligopolies that leave consumers worse off.

The Effect on Tesla’s Price

All of that leaves Tesla at a precipitous point. Musk's EV manufacturer can't seem to catch a break despite a rather successful 2023. US efforts to safeguard and foster their own can potentially prove to be the boost Tesla needs to bounce back.

Unfortunately, with a thin guidance for 2024, the company isn't exactly reassuring investors of their dedication to do so. In fact, Tesla's CFO Vaibhav Taneja said on the January earnings call that volume is expected to be lower for the year.

Regardless, analysts are forecasting a bigger revenue target for the second quarter, which if reached, would make it the first of the past four to be in the green, potentially signaling an optimistic turnaround.

Technical Analysis

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Key Support and Resistance Levels
Tesla's stock has found solid support and resistance on several key price levels, tested on multiple occasions since 2020:

  • $139 Level: This support level is the yearly low.
  • $160 Level: A lower-level support that has been tested over the past four years.
  • $216 Level: The comfort zone is where the price has frequently found support.
  • $266 Level: This is the yearly high, which acts as a resistance level.
  • $300 Level: The level is a major resistance and is also 2023's high.
  • $390 Level: This is a strong resistance near the all-time high.

Exponential Moving Average (EMA):
The oscillators are shifting from a downward trend to a more neutral stance, indicating potential stabilization and support at current levels.

50-Day Moving Average: Finding support here suggests potential for a bullish trend. The possibility of a "Golden Cross" (where the 50-day MA crosses above the 200-day MA) could indicate a strong upward momentum in the coming months.

Liquidity Zones

  • Sell-side Liquidity: Concentrated at the $160 level, could potentially indicate where long traders have positioned their Stop Losses, and can double as a support level by extension.
  • Buy-side Liquidity: Noted at $314, might indicate a substantial resistance zone where short traders could have potentially set their Stop Losses.

Potential Upside and Earnings
On the chart we can see that the last time Tesla found support at around $155 in May 2023, it surged by 91%. This historical movement could be repeated, granted they release a favorable quarterly report.

Conclusion
Tesla's stock is currently navigating critical support levels. The moving averages indicate a possibility of a bullish trend, especially if the stock maintains support at key levels. Liquidity zones suggest where significant buying and selling pressures might emerge. Earnings reports will also play a pivotal role in shaping market sentiment and price action.

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  • mushiyani vutshilo @mushiyani vutshilo
    good read
    Like 1
    • Krasimir Velichkov @Krasimir Velichkov
      @mushiyani vutshilo Thank you, Mushiyani. I'm glad you enjoyed it.
      Like 0
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  • Themba Shamase @Themba Shamase
    $160 level was a resistance in 2020, Support in 2023 . If broken price can never get below $120
    Like 2
    • Krasimir Velichkov @Krasimir Velichkov
      @Themba Shamase That's an interesting observation, Themba.
      Like 0
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