Tesla (TSLA) - How Should You Play It?

Shares of Tesla (TSLA) are once again giving traders big daily moves. After the stock hit a 52-week low of $101, it bounced back above $210, and now it appears to be heading lower again.

The catalyst for the move lower was primarily the company's most recent earnings report, which, despite sales, revenue, and earnings all coming in strong, margins took a hit.

Tesla has dropped prices on its vehicles five times over the last year, so margins taking a hit should not have been as much of a surprise as it was to the market.

However, Tesla still has a strong market position and is still producing industry-leading margins. The issue is that those margins are shrinking, and at some point, Tesla may see its margins fall more in line with the rest of the auto industry.

We have seen these types are situations play out in other sectors as companies grow and mature. The best example I can think of is Whole Foods.

When Whole Foods was a young, fresh company, it commanded upwards of 5% margins on its products. But, as the company grew and the rest of the grocery industry noticed what Whole Foods could do with selling premium products and commanding higher margins, other grocery store chains began to offer similar products.

This competition for the customer naturally puts pressure on Whole Foods' margins, thus forcing them to lower prices and lose their high margins.

I believe the same story is now playing out with Tesla. At this time, it is clear that the world is moving away from combustion engine vehicles, although slower than some would like. And as consumers move towards more electric vehicles, more companies are offering alternatives to just buying a Tesla.

More competition is always a good thing for the consumer, but not always the best thing for one individual company.

For years, Tesla was, in many ways, the only legitimate player in the EV industry (sorry, Nissan Leaf, but it is true.) Tesla's most significant differentiating factors that held off the competition in the past were that it was a high-end luxury EV with a superior battery range.

Both factors have eroded as Lexius, BMW, Mercedes, and other luxury car manufacturers have entered the EV segment.

As for the dominance in battery range, while Tesla is still the leader, the other players have closed the gap on how much of a lead Tesla has, again giving consumers many more options besides just buying a Tesla vehicle.

While I don't believe Tesla will fade into oblivion or even get bought out by another company, like what happened to Whole Foods. I do think we are now going to see Tesla posting numbers that are more in line with auto industry standards.

That means the stock's current valuation is grossly high. Tesla is trading at 49 times earnings, while the auto industry, on average, is well below a P/E of 10. The only other prominent car manufacturer that is trading even remotely close to Tesla is Ferrari.

Still, they aren't selling remotely close to the number of Tesla vehicles, so that may not even be a good comparison.

I think investors should be cautious moving forward with investing in Tesla to the long side. I lean towards even getting short Tesla since I believe we are now in a new era where Tesla begins to fall more in line with the rest of the auto industry, with a slight valuation premium, not a four times higher valuation.

A few ways you can short Tesla without shorting the stock are exchange-traded funds.

The Direxion Daily TSLA Bear 1X ETF (TSLS) or the AXS TSLA Bear Daily ETF (TSLQ) are good options. These ETFs will increase in value if Tesla's stock continues to decline. But, if Tesla stock goes higher, these ETFs will decrease in price.

If you think I am wrong and Tesla is just pausing before it rallies back, you can buy the GraniteShares 1.25X Long TSLA Daily ETF (TSL) or the Direxion Daily TSLA Bull 1.5X Shares (TSLL). Both ETFs will increase in price if Tesla's stock reverses course and goes higher.

Remember, though; these are all ETFs that are leveraged in some manner, meaning if Tesla stalls and doesn't go higher or lower, these ETFs will lose value due to contango.

Furthermore, contango will affect these ETFs if you hold them for long periods. While most contango has an effect daily, if you hold these ETFs for a few days or weeks, you should see much of an impact. Months, however, you likely will feel the contango effects.

Whether I am right or wrong, Tesla is always a fun stock to watch and follow, so add these ETFs to your watchlist even if you decide to follow from the sidelines.

Matt Thalman
INO.com Contributor
Follow me on Twitter @mthalman5513

Disclosure: This contributor did not hold a position in any investment mentioned above at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.