How to Trade Tesla

When Tesla (NASDAQ:TSLA) peaked at almost exactly $500 ($502.49) at the start of September, speculators should have taken the hint and sold. Tesla stock bounced off the 50-day simple moving average and is trying to rebound. How should investors trade Tesla from here?

Buy and Speculate

Tesla may retrace half of its loss from the peak, bouncing back to over $400-$425. But at a P/E near 1,000 and a debt/equity of 1.4 times, valuations may start worrying investors. Previously, markets did not care about such metrics because the stock rose steadily from around $100 in April through the summer, non-stop.

Tesla has no positive catalysts ahead, either. EV sales increased, probably because of pent-up demand following the lock-down. The practical value for an EV is declining if work-from-home continues and return to work is part-time.

Sell and Short

Nikola (NASDAQ:NKLA) briefly returned to the $50 level after General Motors (NYSE:GM) foolishly invested $2 billion (non-cash) in the firm.

But having a prototype and no proof of a product to market by later this year suggests far too much risk ahead. NKLA surged in May during the EV hype, finally topping $93.99. Nio (NYSE:NIO) enjoyed the ride higher, while China’s Xpeng (XPEV) went public to cash in on the bubble.

If the EV hype is permanently over, Tesla shorts may re-build their bet against the company. Tesla makes very little profit and cash flow will weaken as capex requirements increase. The Gigafactory expansion will add to costs in the short-term. Tesla needs unit demand increasing.

Otherwise, the stock will keep falling.