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.

However, there is no small amount of competition for middle-class electric vehicles competing with Tesla at this price point. Green car reports lists 11 cars currently on the market with prices at or below Tesla’s Model 3 price point.

• 2016 Mitsubishi i-MiEV – $23,845
• 2015 Smart Fortwo Electric Drive – $25,750
• 2016 Chevrolet Spark EV – $25.995
• 2016 Nissan Leaf – $29,860
• 2015 Fiat 500e – $32,780
• 2015 Ford C-MAX Energi – $32,645
• 2016 Chevrolet Volt – $33,995
• 2016 Ford Fusion Energi – $34,775
• 2015 Ford Focus Electric – $29,995
• 2016 Volkswagen eGolf – $29,815
• 2016 Kia Soul EV – $32,800

With so much competition, and most of it coming from established car companies with established distribution channels and hefty marketing budgets, it is difficult to see how Tesla will be able to aggressively capture market share from the “old guard” auto manufacturers.

Perhaps more important is the issue of low oil prices and their effect on electric vehicle demand. One of the biggest selling points for middle class electric vehicles is that they are cheaper to operate than traditional vehicles which burn gasoline.

The problem is that with cheap gasoline, this cost issue becomes a much less important argument. Today, the retail price for a gallon of gas is at the lowest level since 2008. And with global oil production still very robust and crude & gasoline inventories very high, a rebound in gasoline prices doesn’t look very likely.

(source: Gas Buddy)

With heavy competition in the middle-class price tier for electric vehicles, and low energy prices curbing overall demand, it is going to be very difficult for Tesla to roll out its Model 3 with enough scale to move the needle in terms of overall revenue growth. So it appears the company’s cash burn problem will likely persist.

Where Is The Value For Tesla Investors?

For a time, momentum stocks like Tesla trade at prices that more closely reflect investor excitement over the concept that a company can offer, rather than on the fundamental value of the underlying company.

I wrote about this concept in November, stating that shares of Tesla were too risky to own at the time. The risk of a decline was based on the assumption that at some point, Tesla investors would be forced to consider the expected earnings of the company, and the share price would trade at a more reasonable multiple of future expected earnings.

Today, the price of Tesla is moving back toward that direction. But the big question is whether fundamental investors can justify owning shares of Tesla at the current price, or if shares need to fall further in order for investors to make a legitimate case for owning a piece of this challenged company.

Wall Street analysts currently expect TSLA to earn $1.71 per share next year. This consensus estimate has been revised lower over the last three months as analysts begin to price in the rise in competition and the effect of lower oil prices on electric vehicle demand.

(source: Yahoo Finance)

For our first scenario, let’s assume that these estimates turn out to be accurate and that investors continue to have optimistic growth expectations for the company. With high expectations, fundamental investors could make a case for paying 50 times earnings for Tesla.

After all, the company is still in the early stages of growth, and even though Tesla does face some significant headwinds, there is room for the company to capture some market share from the established auto industry and that market share should move the needle significantly for Tesla’s future revenue growth. Today, Tesla 12-month revenue is at $3.79 billion, compared to $152 billion for General Motors (GM). So Tesla has room to significantly increase revenue for some time before they become a “major competitor” that the big auto manufacturers need to worry about.

Under this scenario (earnings expectations of $1.71 per share and a multiple of 50 times earnings), Tesla could find support near $85.50 per share. This is about the highest price that I would consider owning the stock. Unfortunately for current TSLA investors, a price of $85.50 represents a near 40% decline from TSLA’s current price near $150. This type of decline could be very painful when tacked on to the 38% drop investors have already experienced this year.

A second scenario could lead to an even more painful decline for shares of Tesla.

As noted above, Tesla reports fourth quarter earnings after the market closes on Wednesday (February 10). Investors will be eager to hear any new updates in terms of production schedules, price points for the Model 3, as well as financial metrics.

If Tesla appears to be losing sales momentum thanks to rising competition and lower demand thanks to oil prices, Wall Street analysts could quickly cut their earnings estimates for 2016. A decline in estimates would likely be compounded by poor investor sentiment and selling pressure as disappointed investors throw in the towel.

Just a 12% decrease to 2016 earnings estimates (to $1.50 per share), and a less optimistic price / earnings ratio of 30 would lead to a stock price of $45. This represents a 70% decline from the current price near $150.

A potential price target of $45 may seem like a dramatic decline, but this would not be an unreasonable valuation for a company whose growth prospects have been steadily downgraded. And keep in mind, that a forward PE of 30 still implies that investors are expecting growth in the future. One additional item that could accelerate TSLA’s decline is the potential for founder Elon Musk to receive a margin call for his 53.5 million shares owned personally.

With so much potential for investor disappointment (and a current stock price that still reflects significant optimism), I believe there is a significant chance that Tesla will trade sharply lower following the earnings announcement this week.

Selling shares short is a very speculative trade with high potential reward, but significant risk as well. This should only be done in small size due to the volatility in TSLA. For my own trading, I will be avoiding the stock for now, and will only be interested in taking a long position in Tesla if it falls into my “fundamentally legit” range of $45 to $85.50.

Admittedly, that is a big range and Tesla’s prospects are still very much in flux. But at the current price, investors are still very much exposed to risk of disappointment.