Tesla’s Model 3 likely to be challenged by BMW 3 Series

In our May 30th market report, we had discussed about record deliveries (25,051) made by electric car manufacturer Tesla Inc. (NASDAQ: TSLA) in the first-quarter and the strong demand for its solar tiles.

Additionally, we also presented our thoughts about investing in a call option. The stock was trading at about $330 at that point in time. In a week’s time, the stock reached a high of about $374 and our option expired in the money.

Now, we expect the stock, which closed at $361.45 last Friday, to decline due to reasons provided below.

The long-term prospects of Tesla are very much dependent on the success of its Model 3 car, which is considered to be the first affordable mass market offering in the electric car segment. Until now, there is practically no competition to Model 3 car. However, it may not be so with the arrival of all-electric 3 Series from the German automotive giant BMW.

Transport Evolved

For quite some time now, there has been rumors about electric BMW 3 Series. However, the company never gave any details about it. In fact, the Munich-based Bayerische Motoren Werke AG never showed any hesitation to disclose its plans about the launch of an electric BMW X3. Last week, German newspaper Handelsblatt, citing company sources, reported that an electric BMW 3 Series may be unveiled as early as September at the IAA auto show in Frankfurt. It is also rumored that Honda, Mercedes-Benz, Jaguar, and Volvo are also planning to unveil their electric car variants at the Frankfurt show.

If BMW enters the market, then it could easily beat Tesla’s Model 3, in terms of production and deliveries. Notably, customers who have booked Tesla’s Model 3 have to wait for years, after paying the initial deposit amount of $1000. The delay may even result in missing out the $7,500 tax break provided for electric vehicles. Unlike BMW, Tesla is in the process of setting up assembly lines from the scratch.

Additionally, Tesla is yet to prove its capability in manufacturing cars on a large scale. Thus, Tesla would likely remain in pressure to prove itself as a dependable large scale manufacturer of electric cars. Large investors and institutions, who generally prefer a company to remain focused, are already concerned about Tesla’s entry into the production of solar panels.

So, on the basis of the above discussion, we expect the stock to undergo a correction in the days ahead.

The stock faces resistance at 370.30 as shown in the image below. The MACD histogram has crossed into the negative zone. Thus, we expect the downtrend to continue.

To benefit from Tesla’s decline, we prefer to invest in a put option. An option validity period of one week and a strike price close to $370 is what we would be looking for before investing in a put option or its equivalent contract.

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