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Tesla

Tesla - a $1tr dream for shareholders

Chris Weston
Chris Weston
Head of Research
Oct 25, 2021
Tesla continues to make a mockery of analysts’ valuation models where the consensus 12-month price target is $741.

Instruments to trade on MT4/5 mentioned in this article: Tesla, US500, NAS100, ARK Innovation ETF.

As we've seen in recent times, it's impossible to put money to work on what the Tesla is doing now, and investors are buying a vision on 2030 and how they execute that strategy.

For traders, Tesla is trending beautifully but is also an out and out momentum vehicle and on days like today, trading it is the very essence of buying high and selling higher - similar to what we saw in GameStop’s and AMCs in January 2021.

Tesla daily – overbought, but dips should be well supported

(Source: Tradingview - Past performance is not indicative of future performance)

We can see 14.02m shares traded on exchange, which is nearly three times the 15-day average; punchy, but by no means outrageous. The options market, however, was where all the action took place, with some 2.44m calls bought on the day, nearly 3.5 times the 20-day average. Notably, 275k contracts bought on the $1000 29 October calls, followed by 216k $1050 29 Oct calls – this is incredible activity and we’ve seen a clear lack of regard for the cost of the options - just buy near-dated calls – the stock subsequently goes in the money and dealers (who sold the calls) have to hedge their delta. That means buying the underlying and again this perpetuates the stock higher.

Short interest in Tesla is low at 3.6% of free float, but there would be some who would have covered shorts in this move above $950, and with Tesla adding $118b of market cap on the day, Tesla has pushed above Facebook as the 5th biggest company by market cap. That’s a solid boost to market cap given the Hertz deal is valued at around $4.2b – Tesla have a market cap now someway bigger than all the listed auto producers combined

With the move and increased weighting in the various indices and ETFs, this just means more passive flow buying.

There is a chain of flow-based activity that happens on days like today and when we see a 12.7% move you know this is not just organic fundamental buying.

Granted, the news that Hertz is buying 100k Tesla vehicles is a huge stamp of confidence in Tesla and the EV project more broadly, especially when you hear Hertz is buying without a discounted rate. However, the orders will give real confidence of Tesla exceeding unit volume estimates through to 2025, even through to 2030, which is the timeline investors are seemingly looking at the real evolution of the adoption story – specifically from Asia, while North America and Europe lag behind.

With new plants coming online and plants expected to be developed in India, China, and the US past 2025, the confidence of meeting increasing demand for units rises and investors wear a higher degree of confidence around its execution strategy. One could say this offers some belief that Tesla’s market share in the EV space may remain firm as we head into the latter years of the decade, where its market share is expected to dip from around 27% by 2027, towards 22% in 2030.

We can talk fundamentals all we want, but after showing strong profit potential in its recent Q3 earnings, Hertz’s placing an order like this, after its own capital constraints, does wonder for Tesla’s PR – add in the options and passive flow and you end with a move like this. In fact, one could argue Tesla has had a dominant helping hand in driving the S&P 500, the NAS 100 – while we’ve also seen good buying in the ARK Innovation ETF.

Tesla is a fascinating story – not just because it divides opinion like few others, even between those who believe in a dominant future for EVs. However, the use of Tesla as a momentum trading vehicle means fundamentals often matter little, and even if you believe in fundamentals as a tool to invest in the business then your essentially buying a vision on 2030 and how they execute it. For now though, Tesla is hot and one to put on the radar.

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