Analyst: Tesla 'Could Set Up For A Short Squeeze'

It’s been a rough week for Tesla, Inc. TSLA and its investors, with the stock dipping below $200 on Monday and Tuesday for the first time since 2016. One analyst said Wednesday that Tesla shareholders shouldn’t expect things to improve anytime soon.

The Analyst

Bank of America Merrill Lynch analyst John Murphy reiterated an Underperform rating on Tesla with a $225 price target.

The Thesis

Tesla bears now control the stock and the Tesla narrative, Murphy said in a note. (See his track record here.)

Tesla still has several major hurdles to overcome before the stock becomes appealing, including a difficult Model 3 production ramp, the company’s ongoing cash burn, falling demand growth for Model S/X and a wave of new competition, the analyst said. 

Despite the headwinds and weakness in the stock, Murphy said market dynamics may ultimately save the day for Tesla.

The stock’s share price is currently at a two-year low, but Tesla’s short interest is at a two-year high, he said. 

“In our view, this could set up for a short squeeze in the coming days/weeks/months should deliveries, profits/losses, cash flow/burn come in even slightly better than draconian expectations, or should Musk introduce another business venture and/or longer-term financial target that once again gets bulls excited about the story." 

Unfortunately, short squeezes are temporary phenomena, and Murphy said Tesla’s path to becoming a viable, self-funded business is as unclear as ever. Tesla’s long-term profitability cash flow and valuation remain in question, he said. 

Price Action

Tesla shares were down 3.4 percent at $198.05 at the time of publication Wednesday and are now down 39 percent over the last six months. 

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Photo courtesy of Tesla.