Tesla continues to skyrocket - for how long?

The Elon Musk-led company is now the second most valuable carmaker in the world. The question is, can Tesla sustain its stellar run or is this simply a classic short squeeze of the highest"order?

Old market sages are always wary when stock prices go exponential and price targets to the moon get published. Indeed. one reason given for the latest spike higher in Tesla has been the $7,000 price target by 2024, given to it by a long-time admirer of the stock. And that’s the base case.

Interestingly, the average price target among Wall Street analysts surveyed by FactSet is $536 ($466 on Bloomberg), although this forecast is only for one year or so into the future. However, it’s the short sellers who are currently getting an absolute shooing, losing a further $3.2bn this month, on the back of $5.8bn in January. Tesla has more short sellers than any other US stock, with 18% of its publicly available shares sold short in mid-January. That’s 24.58mn shares, equivalent to $14.28bn, and the number of shares shorted has not dipped below 20mn since mid-2013.

Meanwhile, the company’s share price has more than tripled in just three months. This parabolic move can be seen in the numbers below:

Days from $300 to $400: 976

Days from $400 to $500: 25

Days from $500 to $600: 18

Days from $600 to $700: 4

Days from $700 to $900: 2

It’s not just the rate of change in the share price that incredible, but the volume too, with Tesla setting a record for the USD volume for any individual US equity on Tuesday.

Signs of better earnings

After recording a loss of more than $1billion in the first half of 2019, the EV maker has turned a corner in the second half of the year. Last week, it reported a record $105 million profit in the final quarter of 2019 and three successive periods of cash generation, with the latest figure an impressive $976mn.

With improving margins and cash buffer, rising deliveries and a China factory that came online faster than expected, Tesla is certainly delivering for many as it continues to benefit from its early mover advantage. Traditional carmakers have yet to come up with anything competitive, with bulls fully believing that Tesla is the dominant brand at the start of a new innovation cycle.

The doubters point to lower revenue and year-on-year profit signalling that the company’s outlook is weaker than it appears. In the short-term, the coronavirus is expected to delay production in its Shanghai factory, while greater competition from those established carmakers will eventually add pressure at some point in the future. But for now, we can only marvel at the record-breaking run of the concept-building Musk and his latest headline grabbing pay-days.

Pepperstone offers clients the ability to be long or short on Tesla, so whatever the view trade it here.