Tesla’s (NASD:TSLA) epic parabolic rise in 2020 was fueled by a multitude of bubble factors. On an August 24th segment of Fox Business, Grizzle warned investors that chasing the mirage of ‘stock splits’ would not end well, we weren’t wrong.
— Thomas George (@thomasg_grizzle) September 8, 2020
We also reminded investors that Tesla wasn’t the only electric vehicle (EV) game in town, without skipping a beat General Motors announced yesterday that it’s forming a partnership with EV startup Nikola along with an 11% stake in the company.
Since the stock split (August 31st) Tesla is down -29%, while GM (NYSE:GM) and Nikola (NASD:NKLA) are up 8% and 7.5% respectively.
Percentage Share Price Move Since Tesla Stock Split
High Options Activity has Supercharged the Upside and Downside
Retail traders have also been a strong force in the bubble run of technology stocks in 2020, the chart below highlights the recent parabolic increase in small trader call buying activity.
In an epic Twitter thread Benn Eifert illustrated the leveraged knock-on effect call buying can have on the underlying stock, in the case of Amazon the leverage can be over 150:1 (stock buying per dollar option premium spent). This is the financial market definition of tail wagging the dog.
The example above isn't particularly extreme, and it involved leverage over 150:1 in terms of AMZN stock buying per dollar option premium spent. Consider the $40 billion premium spend from small traders over the last month (h/t @sentimentrader). pic.twitter.com/lHYnpccVg7
— Benn "DJ D-Vol" Eifert (@bennpeifert) September 6, 2020
The added kicker to this options bonanza is the involvement of SoftBank, last Friday (September 11th) the FT reported that the company was responsible for large bets on growth tech stocks using call options. The WSJ reported the company had spent over $4 billion on options on tech stocks (ie. Apple, Tesla etc).
The Telsa / Technology Unwind, Where to Now?
The same leveraged forces that drove Telsa and it’s technology peers parabolic higher ultimately drive the shares lower with the same velocity. Since the peak (August 31st) – Telsa was down -33% as of yesterday, today’s green day (+6%) has brought it to down -29%.
Price Percentage Off Highs: Tesla & GM
However the technology market internals on today’s strong green day are showing investors are rotating to quality (ie. profit) over hype/growth (ie. Tesla) – Apple is up 5% today, nearly the same as Tesla (+6%) – while it’s fall from the peak was only 16%.
With GM’s tie-up with Nikola we believe investors will now have a much greater focus on the underlying valuation of Tesla’s business. Paying 11x price-to-sales for a company who’s sales are down -5% year/year seems rather absurd, relative to a business that could be as sexy, in GM, trading at 0.4x price-to-sales.
We believe technology investors are far better positioned on a risk-adjusted basis owning Microsoft (NYSE: MSFT).
Forward Price-to-Sales: Telsa vs. GM
The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Grizzle hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.