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Will the battery die on Tesla’s share price surge?

It appears Elon Musk isn’t just building rockets for his space venture SpaceX, his latest takes the form of Tesla’s [TSLA] share price.

Looking at the chart, Tesla’s share price gains since last summer have been astronomical. During that time, its market cap has climbed to $159.8bn, making it the second most valuable carmaker in the world – behind Toyota’s [TM] $200bn. Recently, the share price has been on an uninterrupted six-day joy ride, climbing 58.9% between 27 January and 4 February to reach a record high of $887.

A slew of positive news has been fuelling Tesla’s share price rally. Its fourth-quarter earnings report announced last week not only topped analysts’ expectations but revealed rising revenue. The company reported total revenues rising 17% from the previous quarter to $7.38bn (and 2% YoY) driven by a record vehicle deliveries in the fourth quarter.

 

 

 

Billionaire investor Ron Baron believes the share price has more room to run too. He told CNBC that it has the potential to hit “at least” $1trn in revenue by 2030, adding that “it’s nowhere near ended at this point”.

 

World domination

Tesla’s global expansion efforts, including the new Gigafactory in Shanghai and planned factory in Berlin, have been key in raising its share price. The company stated that it expects to “comfortably exceed” 500,000 vehicle deliveries this year.

A number of recently revised price targets on the stock has further extended its rally, with AKR Investment and Argus Research both poising bullish outlooks.

As it stands, the company is valued at more than double that of Ford [F] and General Motors [GM] combined. Unlike these industry stalwarts, however, Tesla has never made a profit. It had ended 2019 with a net loss of $775m.

$775million

Tesla's net loss at the end of 2019

  

Move over short-sellers, options traders are winning big

While the share price is clearly hot in demand and primed for growth, Tesla’s lack of profitability is worrying investors.

Short-sellers have been suffering amid the share price’s meteoric rise. According to data from financial analytics firm S3 Partners, in an article for Shortsight, Tesla pushed Apple [AAPL] to the side and was the most shorted share price in the US by the end of January. Short interest stood at $15.86bn on Monday (3 February), with 24.38 million shares shorted — 18.22% of its float.

Even activist short-seller Andrew Left, of Citron Research, has turned back on its promise to never be short on Tesla’s stock again, recently writing in a tweet that “we believe even Elon would short the stock here if he was a fund manager”.

A short squeeze could be spurring the share price rally, as many short-sellers are likely covering their bets by buying more shares. Indeed, it appears options traders have been the big winners recently. Tesla’s share price record intraday high of $968.99 on Tuesday (4 February) proved to be a sweet spot for traders who held out $800 call options, after they jumped from $0.25 to $24.22 on Monday, according to Bloomberg.

 

Market Cap$139.51bn
Return on Equity (TTM)-10.75%
EPS (TTM)-4.92
Quarterly Revenue Growth (YoY)2.20%

Tesla share price vitals, Yahoo Finance, 05 February 2020

 

Signs of a downturn

While there’s no argument that Tesla’s business is fundamentally doing well, there’s no ignoring the fact that it’s operating at a loss. As a result, many have been quick to compare its outsized growth to the historical price action of assets such as Bitcoin, as well as instances from the dot-com bubble.

“I’m not saying this is the top,” Peter Cecchini, chief market strategist at Cantor Fitzgerald, told The Wall Street Journal. “I don’t have a target [price], or a view on where it goes from here. It just feels like other bubbles.”

Indeed, the share price’s recent run-up has fulfilled the criteria of a model developed by Harvard Business School, that indicates a crash is more than 80% likely, Mark Hulbert writes in MarketWatch.

The definition of a bubble given by the Harvard researchers is “a sharp price run-up over a two-year period followed by at least a 40% drop over the subsequent two years.”

This probability is increased by a larger run-up prior to any bursting bubble, Hulbert explains. “When the price run-up is 100% or more, they found the probability of a crash becomes 50%. When the share price run-up is at least 150%, that probability becomes 80%, and as price run-ups become even bigger, a crash becomes ‘nearly certain’,” Hulbert writes.

“When the price run-up is 100% or more, they found the probability of a crash becomes 50%. When the share price run-up is at least 150%, that probability becomes 80%, and as price run-ups become even bigger, a crash becomes ‘nearly certain’” - Mark Hulbert

 

The signals are certainly worrying. Perhaps the glove will end up on the other hand for short-sellers after all.

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