Tesla (NASDAQ:TSLA), is in serious trouble. It has fallen $80 per share (40%) over the past month and a quarter and $260 per share (67%) since its high in April. It’s becoming clearer that China, the market on which the company was once dependent for its survival, may bring Elon Musk even more problems in the coming weeks and months.
Morgan Stanley analysts stated that Tesla Motors was so dependent on China that the stock is now a Chinese tech stock. They said that Tesla Motors generates up to half of its profits from China. This is a concern considering Musk’s continued decline in China sales and Musk’s business connections to China.
China cut a pro-Tesla subsidies program and deliveries of Chinese-made cars fell to their lowest level in five months in December. This caused TSLA prices to drop in the country for the first time in three months. Prices are down between 12% and 24% since September, according to TSLA.
This is a minor stock blip. It may not be, as history suggests. Tesla’s troubles may just be beginning. In fact, when China cut back on its tax subsidies, car registrations dropped by more than 95% in 2017. China admits that Tesla may need to take drastic measures to remain afloat. The China Merchants Bank International (CMBI), for instance, stated that Tesla must further reduce prices and expand its sales network within China’s lower-tier cities. This is despite the fact that many of their models are getting older.
Worse for TSLA, however, is the fact that even if Musk is successful in repairing relations with China, the new Congress will likely crack down on companies they believe are too closely tied to the communist regime. Musk’s companies are at the top of that list.
The Wall Street Journal published a story last year that stated that lawmakers were concerned about China’s potential access to classified information held by Musk’s Space Exploration Technologies Corp. (including through SpaceX’s foreign vendors that might have ties with Beijing).” These concerns led to Rep. Chris Stewart (Republican from Utah) calling for classified briefings, and Sen. Marco Rubio, (R-FL), to introduce a bill that would restrict government contractors such as Musk, who still maintain their ties with the Chinese Communist Party.
As the Senate and House are split between Republican control and Democratic control, it is likely that Musk’s regulation will be a higher priority for Congress. It represents the only way they can govern in a bipartisan manner 2023. According to a Chongyang Institute for Financial Studies senior fellow, “only through addressing China’s concerns can both sides form a united front.” It’s not that China is the enemy that will devastate the U.S. tomorrow, but rather because they are unable to reach consensus on many domestic issues in the US. They can only use China as a way to shift the topic.
The concerns about the future of TSLA have only been heightened by Kevin McCarthy’s election as Speaker of House. He stated this summer that he would lead a congressional delegation in Taiwan. This summer, he also co-authored an opinion piece with Rep. Mike Gallagher (R.Iowa), who is chairman of the Select Committee on China. It was entitled, “China and America are locked in a Cold War.” It must be won. Here’s how it will be won.” He is expected to team up with Sen. Majority Leader Chuck Schumer (D–NY) will address China’s perceived threat in some capacity.
Some big players expect the recent rally in Tesla shares to end. Nearly 10,000 February $100 puts were traded Friday for $3.00. This is a 3-million-dollar wager that Tesla’s sell-off will continue.
These put options are being bought by the big-time buyers. They will cause more damage to Tesla stock and a significant break of the $100 support level. The trader can use bearish options to shorten the stock, but with a defined risk.
All of this means that TSLA appears to be in a classic “damned if it does, damned if it doesn’t” situation. While fixing its China profitability issues may be a good idea in the short-term, it could also fuel its congressional regulatory crackdown that could have a significant impact on sales in the United States. Investors should avoid investing until the dust settles.
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Friday’s close of TSLA shares was $122.40, a decrease of $-1.16 (-0.94%). Year-to date, TSLA shares have declined 0.63% compared to a 4.20% increase in benchmark S&P 500 index over the same period.
About the Author: Tim BiggamTim was Chief Options Strategist for Man Securities in Chicago for 13 years, and 4 years as the Lead Options Strategist of ThinkorSwim. He also spent 3 years as Market Maker at First Options in Chicago. He is a regular guest on Bloomberg TV, and a contributor to “Morning Trade Live” at TD Ameritrade Network. His passion is to simplify the complicated world of options and make it more accessible to everyday traders.
Tim is the editor for the POWR Options newsletter. Find out more about Tim and his background. More…
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Title: TSLA: Will China Be The Ultimate Downfall For Tesla (TSLA) ?
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