To say that the rise of Tesla’s stock price (NASDAQ: TSLA) is parabolic would be an understatement. The stock has tripled since the same time last year and has more than quadrupled since it hit its lows back in May 2019.
This explosive increase in stock price has both retail and institutional investors scratching their heads and the word “bubble” is being tossed around more and more often everyday. We explore the fundamental merits of this rocket-ship stock run.
Bubbles: Bitcoin vs. Tesla
Investors can’t help but be reminded of the big Bitcoin bubble back in 2017. Looking at a Bitcoin price chart in 2017, we saw an increase of around 1300% in price and at its peak Bitcoin hit over a 1900% price increase in December 2017 compared to January 2017.
Bitcoin Price Change % (January 2017-December 2017)
Tesla Stock Price Change % (TTM)
Tesla on the other hand, has only increased by just over 180% since a year ago. But it is perhaps unfair to compare Tesla to Bitcoin, since Tesla is an actual company that makes products as opposed to cryptocurrencies that are not backed by anything. Tesla would have a natural ceiling in terms of how high the price could run up just due to the fact that the stock would at least somewhat be backed by the company’s capacity to produce cars versus with Bitcoin, which promised to completely disrupt the idea of currency as a whole.
Still, when Bitcoin prices peaked in December 2017, the following months were pretty brutal for anyone who got in at those prices. Usually when any asset, whether it’d be Bitcoin or Tesla stock, rises in a parabolic formation, the other side of that graph is a big cliff.
Should You Short Tesla?
With that being said, it may be tempting for some to think that it is a good time to short Tesla stock. It’s something that is relatively inexpensive to do right now given that the borrow on shorting Tesla is relatively low.
However, it must be said that shorting Tesla right now comes with extreme risk. That cheap borrow cost was available throughout the meteoric run in the stock, and all those that have shorted during that period have seen their capital completely decimated.
Trying to time and gauge when Tesla stock peaks is absolutely a mugs game, which makes shorting the stock nothing more than a casino wager. According to Yahoo! Finance, the short % of Tesla shares on Jan 15, 2020, even before the latest huge run up, was at 13.84% which is historically low for Tesla.
Clearly, most of those who were short Tesla even before the recent price increase have already admitted defeat. At this point, short squeeze is not even a major reason why the stock has run up so much. Most who have shorted Tesla have already covered (or have gone insolvent).
Should You Go Long On Tesla Then?
Conversely, going long on Tesla is a casino bet as well, it is one of the most expensive stocks in the entire market.
Tesla is now worth a market cap of over $160 billion. To put that into perspective, that is more than the market caps of Volkswagen, or Ford and GM combined. The forward P/E ratio on Tesla is around 65x, which puts it in a completely different league to other automakers, which typically trade at forward P/Es of around 10x.
What’s Behind This Huge Run-Up In Stock Price? Two Words: Retail Investors.
The recent explosion in Tesla stock price is certainly different than other stock price explosions we’ve seen in the past. The reason is that with Tesla, it has largely been driven by retail investors.
Furthermore, the buyers are comprised of a mixture of educated retail investors and people with massive FOMO (fear of missing out). At least initially, much of the early heavy buying has been done by people who have done a lot of research on Tesla, particularly people who watch and follow finance related websites online or tech related YouTube channels, on those which, Tesla has been a favourite pick among non-institutional investors for a long time.
Taking a look at the chart for Tesla on RobinTrack, a website that tracks the price of a stock versus the amount of people on the popular trading app Robinhood who are holding the stock, we see that many more retail investors are rushing into the stock due to massive FOMO, which only helps the stock run up even more.
Also, it is interesting to note that Tesla is by far the number one most popular stock on Robinhood right now. We should also not ignore the influences on retail investors on popular websites such as Reddit’s WallStreetBets, with multiple people posting gains of hundreds or even thousands of percentage points daily on their Tesla long positions.
Last December, the famous CNBC pundit, Jim Cramer, made news when he announced that he had finally converted into a “true-believer” of Tesla, and decided to go long on the stock. At the time, Tesla had already increased to around $400 a share.
Tesla Could Be Included In The S&P500 Soon
The eligibility requirement for inclusion into the S&P500 index requires that a company be profitable for 4 consecutive quarters. The latest earnings report for Q4 2019 bring Tesla one step closer to fulfilling this requirement as the company posted a profitable quarter.
Right now, Tesla is the most valuable U.S. company to not be included in the S&P500. If Tesla continues on its current track of being consistently profitable, it will no doubt be eventually included and in turn cause passive ETF managers to be forced to buy into the stock. This can potentially add even more buying pressure to a stock that is already white-hot.
The Cult of Elon Musk & The Inevitable Capital Raise
Much of the hype surrounding Tesla has been around their famous (or infamous) CEO Elon Musk. He has built somewhat of a cult following with very devoted fans who are willing to follow him in whatever he says or does.
This has been a great boon for Tesla who people see as a piece of Musk that one can buy into. This is not just talking about retail investors, even institutions are not immune to Musk’s reality distortion field. Back in May 2019, Musk raised $2.7 billion for Tesla and it comprised of a mixture between $860 million in new shares and $1.84 billion in debt. This was around the time when the stock price had hit a 52-week low of just under $200/share.
With the stock now at all time highs, it seems like a good idea for Tesla to raise some more cash. Although there is not a desperate need for cash, seeing as the company has $5.33 billion of cash on its balance sheet right now and its current ratio is above 1, it may still be a good idea to reduce some of the debts that Tesla has coming due. Tesla has $2.36 billion worth of debt due before the end of 2022 with $1.38 billion of that debt coming due sometime in 2021.
Tesla now has the advantage of being cash flow positive, and this has certainly contributed to boosting investors’ confidence. Musk should take advantage of the soaring stock price to reduce some of the debt risk just for the sake of bolstering Tesla’s balance sheet a bit more.
The Final Verdict
This stock has gone full casino mode, there are no fundamentals that can justify price action from here — this is gambling, not investing. Bets made today will make great memes, very few will result in real wins that investors hold on to.
For those looking to speculate, we’d recommend sitting on the sidelines till the inevitable capital raise comes. This may be the pivot in the share price that short sellers could pounce on.
Strap in and don’t lose your shirt, this is only going to get more bizarre from here!