Could Tesla Fall Another 40% To 70% Before Finding A Bottom?

Tesla Motors (TSLA) has been one of the high-profile casualties in this volatile new year. In the first few weeks of 2016, shares have fallen from $240.01 to a current price near $150. That represents a 38% decline in less than six weeks.

Tesla enthusiasts may believe that today’s discount share price represents a good buying opportunity. But looking more closely at the company’s fundamentals and the overall market environment, this “discount price” could actually be a value trap. I believe that shares will likely fall much farther, leading to more than a 40% loss under a optimistic scenario, and potentially risking as much as a 70% decline under a more disappointing set of circumstances.

With the company set to report earnings after the close on Wednesday (February 10), I would avoid buying any new shares ahead of the earnings announcement and would consider a speculative short position to profit from a further decline.

To understand why the stock could fall much farther, let’s take a quick look at the company’s challenges, the value proposition for investors, and finish with a target range based on two potential investment scenarios.

Two Market-Sensitive Challenges For Tesla

As a widely-followed public company, there aren’t many new or unidentified problems that Tesla faces. The challenges with rolling out a fleet of luxury (and now economy with the Model 3) vehicles have been well documented.

Tesla also has a severe cash burn problem that will likely be exacerbated by the current market decline. (With a lower stock price, TSLA will have to sell more shares to raise the same amount of cash – causing more dilution for current shareholders. And debt markets are becoming more challenging with high-yield debt prices dropping – which corresponds with higher rates of interest on new loans issued.)

Rather than revisit these well-known challenges, I want to focus on two issues that are specific to today’s market and will likely weigh on TSLA’s stock price during 2016.

First, there is the issue of increasing competition for “economy-class” electric vehicles. Tesla’s expansion plans include rolling out the “Model 3” which is expected to retail for around $35,000. The hope is that this vehicle will have wider mass appeal to middle-class consumers, allowing Tesla to boost their market share.