Can the Tesla share price keep rising?

With US$950 in the rear-view mirror, where do analysts see the Tesla stock heading next?

Apologies Tesla bears, but it looks like the bull party is not going anywhere just yet.

On Tuesday 05 February, the share price of the electric vehicle pioneer soared past US$950 to hit a new peak of US$963.93.

In just two days, the in-demand stock has risen about 36% from last week’s closing price of US$650.57.

With this new price tag, Tesla now possesses a market capitalisation of US$160 billion, which is larger than the next three biggest US car manufacturers – namely General Motors, Ford, and Chrysler – combined.

It has been lightning-in-a-bottle for the Tesla share price since the start of the year, having grown a massive 110% in value in these past five weeks.

The stock had already enjoyed a bullish second half of 2019, when it rose nearly 50% between August and December, on the back of higher vehicle deliveries and the launch of the Chinese market.

Long-term view one: Tesla shares are overvalued

Despite the share price’s sustained upward trajectory, Tesla’s stocks remain as polarising as ever among analysts.

Some market observers maintain that the stock is overvalued, on the basis that the automobile company’s price-to-sales (P/S) stock ratio of 5.6 is well above the rest of the car industry. Ford, General Motors and Chrysler have a P/S ratio of 0.2275, 0.3346, and 0.17 respectively.

‘Tesla has gone parabolic,’ said Matt Maley, chief market strategist at Miller Tabak told CNBC. ‘This is taking Tesla well above a level that would be supported by its current fundamentals… The stock is going to get absolutely clobbered at some point before long.’

Echoing a similar sentiment is former US presidential candidate Ralph Nader, who warned Tesla ‘believers’ to ‘watch out’.

‘Deep in (debt), selling less than 400,000 vehicles last year, and challenged by several competing electric car models in 2020, Tesla’s stock valuation stunningly exceeds Volkswagen, which sold over 10 million vehicles last year,’ he wrote on Twitter.

Two weeks earlier, when Tesla first surged past US$100 billion in market value, asset management firm Alliance Bernstein had expressed its doubts on the stock value, stating that the company’s ‘near-term risk/reward is skewed to the downside’.

It came to this conclusion after it found that large-cap US firms that doubled in market value within a six-month period over the last 40 years had subsequently achieved ‘a forward six-month absolute return of just 2.6%’ on average.

Long-term view two: Tesla will increase market dominance

Tesla supporters, on the other hand, who are likely feeling more justified than ever in their predictions, are unsurprisingly standing by their initial forecast, with some even revising their price targets higher.

Following last week’s Q4 earnings, which surpassed Wall Street estimates, US investment firm Ark Investment then raised its average price target on the company’s stock to US$7,000 from US$4,000. The company predicts that Tesla would achieve this valuation by 2024.

The firm arrived at this number by using a probability matrix to calculate the equity’s base and bull cases, based on three variables – gross margin, capital efficiency, and autonomous capability.

‘Our bear case implies that Tesla will sell 3.2 million vehicles in 2024, cutting its share of total EV sales roughly in half compared to today’s levels. Our bull case implies that Tesla will maintain its roughly 18% market share, and that a substantial percentage of its fleet will generate high-margin robotaxi platform fees’, Ark wrote in a research note.

In the last quarter of 2019, Tesla reported auto gross margins of 20.9%, excluding revenue from the sale of zero-emissions vehicle credits. Ark expects the company’s auto gross margins to approach 40% in 2024.

Others are even comparing the stock to Bitcoin, citing the fact that both products have risen over 150% in the 12 months. The cryptocurrency has increased 165% since February 2019, while Tesla stocks have surged 187%.

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Tesla’s short sellers burned

Unfortunately, the biggest loser in all of this right now are short sellers – investors who bet on falling prices – who formed nearly 24% of all open positions on Tuesday.

Paper losses on short trades amounted to about US$2.5 billion on Monday 03 February alone, according to data provided by US fintech firm S3 Partners. In January, Tesla shorts were down US$5.84 billion in mark-to-market losses.

Over the last seven days, short interest decreased by 651,000 after stock price rose 15.18%. This equates to US$424 million of short covering.

Over the last 30 days, the total number of shorts have decreased by 1.37 million shares as its stock price has risen by nearly 50, amounting to US$888 million of short covering.

Why short sellers are driving Tesla share price up

As Tesla is the most shorted US stock at the moment, with over US$15 billion in short interest making up 18% of its float, many analysts are expecting a so-called short squeeze – in which short sellers rush to buy more shares to protect against further losses.

Ironically, when this happens at a huge volume, share price tends to get ‘squeezed’ up exponentially (hence the term), which could lead to more short sellers covering their positions, and prices going up even further.

Based on the figures from S3 Partners, a short squeeze has been happening for a while now. Since the stock’s low point of US$178.97 on 03 June 2019, Tesla short sellers have covered 19.31 million shares worth a total of US$12.6 billion.

But the next wave of short buyers will not be as ‘dramatic’ as some are envisioning, the firm added. Instead, it is more likely to be ‘a continuous slow decline in shares shorted rather than a sudden abrupt plunge’.

Share price prediction for the near-term

Whether this is true or not, price rallies can be expected to continue for at least a while more, with a number of short positions still exposed.

Furthermore, combined with positive Q4 updates in which the company achieved US$105 million in profit, Tesla's share price could potentially go even higher in the short-term.

Wedbush analyst Dan Ives sees the share price eventually hitting US$1,000 in the most bullish scenario, assuming that the company manages to secure a significant chunk of the Chinese EV market in the next 24 months.

‘While Tesla shares remain on a historic rally post-earnings, the bull party will probably continue in the near term.’ he said, adding that global EV demand in the next few years will rise, with Tesla at the centre of it.

On the flipside, other US brokers like Jason Harris believe the ‘bubble’ will burst sooner rather than later, and that prices will ‘come back to reality’.

‘Once this does have a blow-off day, (share price) will probably come back below US$600, consolidate, then figure out where to go from there,’ said Harris.

There are strong arguments on both sides, and whether you side with the bears or the bulls, there is no denying that the Tesla story is certainly one to keep up with.

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Deze informatie is opgesteld door IG Europe GmbH en IG Markets Ltd (beide IG). Evenals de disclaimer hieronder bevat de tekst op deze pagina geen vermelding van onze prijzen, een aanbieding of een verzoek om een transactie in welk financieel instrument dan ook. IG aanvaardt geen verantwoordelijkheid voor het gebruik dat van deze opmerkingen kan worden gemaakt en voor de daaruit voortvloeiende gevolgen. IG geeft geen verklaring of garantie over de nauwkeurigheid of volledigheid van deze informatie. Iedere handeling van een persoon naar aanleiding hiervan is dan ook geheel op eigen risico. Een door IG gepubliceerd onderzoek houdt geen rekening met de specifieke beleggingsdoelstellingen, de financiële situatie en behoeften van een specifiek persoon die deze informatie onder ogen kan krijgen. Het is niet uitgevoerd conform juridische eisen die zodanig zijn opgesteld dat de onafhankelijkheid van onderzoek op het gebied van investeringen wordt bevorderd, en dient daarom als marketingcommunicatie te worden beschouwd. Hoewel wij er niet uitdrukkelijk van weerhouden worden om te handelen op basis van onze aanbevelingen en hiervan te profiteren alvorens ze met onze cliënten te delen, zijn wij hier niet op uit. Bekijk de volledige disclaimer inzake niet-onafhankelijk onderzoek en de driemaandelijkse samenvatting.

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