Tesla (NASDAQ:TSLA) stock is up more than 8% from its mid-May lows of around $550. TSLA stock made a great trade for flippers who bought the dip. However, Tesla’s near-term outlook isn’t great, and investors should be wary of buying the stock at this point.
TSLA stock is the mother of all high-growth, momentum-driven cult stocks. It has also been one of the best investments in the market in the past couple of years.
But there are simply too many factors working against Tesla in the near term for investors to feel safe buying it at this point. Here are four reasons to avoid TSLA stock.
TSLA Stock Has a China Problem
I’ve repeatedly written about Tesla’s issues in China. China is a major part of Tesla’s long-term growth narrative. However, I’ve been warning TSLA stock investors about a growing problem in China since Feb. 19.
At the time, China’s state-controlled newspaper The Global Times was publicly bashing Tesla for safety issues and quality controls. It specifically mentioned “unexpected accelerations, battery fires and abnormal over-the-air (OTA) upgrades” as major problems.
Some TSLA stock investors dismiss the stories as Chinese government propaganda. I said it does not matter if it’s propaganda or not. If the Chinese Communist Party wants Tesla to fail in China, that is the real story.
Tesla’s China sales plummeted 27% month-over-month in April. And the negative Chinese headlines just keep coming. On May 30, The Global Times reported on Tesla’s “safety woes, especially regarding its braking system after a slew of incidents have been reported.”
The Stock Is Overvalued
The point of valuation is another one I have repeatedly emphasized. I get why TSLA stock bulls don’t like the stock to be compared to General Motors (NYSE:GM), Ford (NYSE:F) and other legacy automakers. After all, Tesla reported 28.3% revenue growth in 2020 while Ford and GM revenue fell more than 10% each last year.
However, Tesla is also extremely overvalued compared to high-growth tech stocks as well. When compared to large-cap tech stock peers Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOGL), Tesla is significantly overvalued based on price-to-sales, price-to-free cash flow and forward price-to-earnings ratio.
And speaking of earnings, those tech stock peers are all extremely profitable. Tesla is still not profitable without selling regulatory credits. And experts expect Tesla’s window of regulatory credit sales will completely close in the next couple of years.
Rising Competition
One of the reasons Tesla will no longer be able to sell regulatory credits is because for the first time in history it will be facing a tidal wave of electric vehicle competition in the years ahead. Some TSLA stock bulls have argued that Tesla is the Apple (NASDAQ:AAPL) of EVs. That may ultimately prove to be true. But up to this point, Tesla has merely been the BlackBerry (NASDAQ:BB) of EVs. Tesla is the first, but not necessarily the best.
The Ford Mustang Mach-E, a single competing model, single-handedly gained about 12% EV market share from Tesla, according to Morgan Stanley.
But Ford is just getting started. President Joe Biden recently showcased the electric version of the Ford F-150 pickup truck, which is expected to ship in 2022. Ford also recently upped its investments in next-generation vehicle technology from $22 billion to $30 billion through 2025.
GM is investing $27 billion on next-gen auto technology through 2025 and plans to launch 30 EV models by that time. Nio (NYSE:NIO), Xpeng (NYSE:XPEV) and other Chinese EV companies theoretically have the support of the Chinese government. Toyota (NYSE:TM) just said it plans to sell 8 million EVs by 2030. That number dwarfs the less than 500,000 EVs Tesla sold in 2020.
The competition is already arriving. Credit Suisse reported this week that Tesla’s global EV market share dropped from 29% in March to just 11% in April.
Tesla’s Technical Picture Is Ugly
As a long-term investor, I’m typically not a huge fan of technical analysis. However, when a stock like Tesla breaks free from all fundamental valuation and trades on pure momentum and sentiment, technicals become much more important.
TSLA stock has not made a new high since January. Since then, the stock has broken back below its 200-day simple moving average and its 50-day SMA. It’s April bounce off the $550 level stalled out at $780.
At this point, TSLA stock appears to be making a series of lower highs. In addition, its descending resistance line coupled with support at $550 forms a descending triangle technical pattern, a bearish technical indicator. TSLA stock has extreme technical resistance in the $660 to $690 range, including both its 50-day and 200-day SMAs.
Until TSLA stock breaks out above $690, it appears its $550 technical support level may be the next level to fail.
On the date of publication, Wayne Duggan held LONG positions in GM and GOOGL. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. Mr. Duggan is? the author of the book “Beating Wall Street With Common Sense,” which focuses on investing psychology and practical strategies to outperform the stock market.