Tesla [TSLA] Stock: It’s A Short Ride
Credit to Author: Frugal Moogal| Date: Wed, 08 Jan 2020 00:00:20 +0000
Published on January 7th, 2020 | by Frugal Moogal
January 7th, 2020 by Frugal Moogal
It seems that every day my phone has been alerting me that Tesla stock has hit a new high. Today, it sent me a message that it is up another 3.88% to $469.06, a price that is actually a little below what it is currently as I write this.
Since November 22, the day after the Cybertruck reveal, the stock is up over $130, or 27%. It’s been quite the run. But, as I pointed out with an article on December 19, it still seems no one knows exactly why.
As I write this, I’m glancing through articles again trying to explain this, with today being focused on news its China factory opened (which actually didn’t happen today, but okay) and that Credit Suisse had some analyst raise their price target for the stock from $200 to $340.
I feel like a few things should be noted, though. The first is that moves like what Credit Suisse did shouldn’t be moving the market on their own. Rarely does a singular analyst make the market move. ARK Invest has been out there with its bull thesis on Tesla for ages, and yet on days the stock wasn’t moving, no one pointed to those arguments and said they weren’t compelling enough. Has something changed at Tesla?
Instead, what we’re seeing by analysts is “herding.” When a company like Credit Suisse has a $200 price point on Tesla stock, people who look at that believe that Credit Suisse doesn’t know what it’s doing, because putting a $200 price point on a stock that is currently trading at $460+ makes you look silly, and makes people who are supposed to be taking your investment strategies as sound believe that maybe you don’t know what is going on.
Basically, analysts who expected Tesla’s numbers to look bad, resulting in a stock price drop, are now changing their tune to try to not look so bad themselves. There is a lot of herding because there are so few institutions willing to really stick their necks out on big guesses. In fact, Credit Suisse puts its mid-term expectation for the stock as somewhere between $165 and $700.
I find groups like this almost useless in trying to determine what is going on with stocks. It would be like saying, hey, I think that the restaurant down the street that sits 100 could gross $1 million tonight or could make nothing, but it will probably make some amount between those two numbers.
I would be right most of the time, of course — as long as the restaurant is open and one person eats there, it would make some money, and unless the restaurant serves crazy expensive food, it won’t make $1 million in a night. Therefore, I’m almost always right, and people who look at my estimates can assume I’m smart, even though I’m really not analyzing anything of note.
I feel far too many analysts do this, and I guess my point here is, if you’re reading people who aren’t making major guesses and their reasons for it, you probably shouldn’t be too certain of your investments. Reading ARK Invest versus a Tesla bear and comparing and contrasting the points of both is far more valuable, I think, than looking at Credit Suisse or any of the regular brokers and going, “Yeah, it’ll probably be worth something in the future, but who knows how much?”
With that buildup, I feel like I need to make some bold claim about why the stock is so far up, but I think we’re in a really simple situation here. Tesla in relatively short order has had a number of good pieces of news. At the same time, the so-called “competition” is consistently proving itself to not really be able to “compete” with Tesla on … well, much of anything.
Additionally, the more that I and others dig into the company, the more the news just gets better. Tesla’s auto business is far ahead of everyone else in electric mobility. Its autonomy stuff, whether you think it is going to win or not, seems to have been significantly undervalued (Waymo, some analysts claim, is worth $105 billion right now, which is still $20 billion more than Tesla is worth as a full company). Most analysts don’t even look at the non-auto portion of the business, which could be worth just as much or more on its own in the future.
But, while I personally think that Tesla still has a ways to climb, I think this current run is mostly driven by short sellers.
Tesla has a large short interest against it — currently sitting at nearly 20% even after the run up. How shorting works, putting it as simply as possible, is you borrow someone’s stock and sell it, intending to re-buy that stock and give it back to the lender after the price has gone down. But, if that stock goes up, you may have to buy it at a higher price point to give it back to the person you borrowed it from.
If you saw Tesla sinking this summer and thought you wanted to make some easy cash, you decided to start shorting. How it usually works for smaller investors is that you have to have enough cash on hand to cover your short position at any given point in time. So, for a simplistic explanation, if I shorted 100 shares of Tesla at $200 and had $2500 in my account, then I would be fine holding onto those shares unless the stock price hit $450, at which point I would be forced to cover my position, which means rebuying the stock and losing the $2500 in the process. Or, I could instead add more money to the account, hoping that the stock would go back down before I had to rebuy it, which gives me less capital to invest elsewhere.
For a $200 stock, having $250 in your account to cover it in case of a big raise would typically be more capital than you’d need — how many stocks go up 125% in a short period of time anyway? So, that would seem safe.
Well, when you’ve got a short position that at one point was nearly 1/3 of the company’s owned shares, you run the risk of shorts covering their position and starting a chain reaction in the process. As noted above, when a person who has shorted the stock decides to cover their position, they have to purchase the stocks — if enough people start doing that, it sends the stock price higher, which forces more shorts to cover, which sends the stock price higher, which…
I think you get the point.
Some of the groups that have been aggressively shorting Tesla may be doing so with no intention of making money, but instead just trying to sow uncertainty about the future of electric mobility — like oil companies. Anyone who has to care about their profits, though, has to be thinking about what to do regarding TSLA. While the short interest hasn’t gone down too much lately, it also hasn’t been climbing much, which tells me that we are having the group that is overextended cover, and then a new group coming in that doesn’t understand what this big run is about, therefore shorting the stock and expecting a dip to a price closer to what these analysts that are supposedly moving the market up are predicting.
So, what I expect to see happen is that we’re going to see the stock continuing to move up on minor bits of noise while more and more shorts are forced to cover for some amount of time into the future, and then after that is basically over, we’ll see the stock settle back down a bit in price.
Don’t take this as advice, though. Short squeezes like this can be extremely volatile. It is just as possible that Tesla could rise to $600/share (“squeezing” the ones who are currently jumping back in to short the stock) as it is that the run could be over tomorrow and we could drop 15% or more when the shorts no longer need to cover and the market settles a bit.
Runs like this are not attached to valuation or anything else. I may be bullish about Tesla’s future (and, I am), but I feel this run is not being caused by a bunch of people suddenly “figuring it out” and instead by a bunch of people who thought it was an easy target to short.
Other than the shorts, I feel there is one other group to thank — and that’s fund managers. At the end of the year, often times fund managers look to purchase a few high-profile, well performing stocks to try to show how they are ahead of the market. When looking at Tesla in December, it had risen a lot, making it a target for fund managers to purchase to try to show their shareholders how they are doing on the latest trends. At the end of quarters, before funds report their holdings, this is another form of “herding” that has very little actual value to anyone, but can benefit stocks in really good ways.
So, there you have it. I spent over 1,500 words describing that I think we’re on a run not because of Tesla’s biggest news pieces lately, but because of short sellers, with a small assist from fund managers who really helped to make this take off. Where the ride will end, I don’t know, but for a bit of time here it’s hard to make any claims about where I expect the stock to settle. I could throw out a “blue sky” number for Tesla of $5000/share or whatever, or I could suggest a number like $300 after the short squeeze is over to try to make myself look smart, but that’s not my style.
Instead, I’ll simply say I expect this roller coaster to get a lot more volatile before things calm down. And it’s a fun ride to watch.
I am a Tesla shareholder who has purchased shares within the preceding 12 months. Research I do for articles, including this article, may compel me to increase or decrease stock positions. However, I will not do so within 48 hours after any article in which I discuss matters that I feel may materially affect stock price is published. I do not believe that my voice could or should influence stock price by itself, and I strongly caution anyone against using my work as your sole data point to choose to invest or divest in any company. My articles are my opinion, which was formulated using research based on publicly available data. However, my research or conclusions may be incorrect.
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Frugal Moogal A businessman first, the Frugal Moogal looks at EVs from the perspective of a business. Having worked in multiple industries and in roles that managed significant money, he believes that the way to convince people that the EV revolution is here is by looking at the vehicles like a business would.