Tesla’s shares closed Tuesday at $887, up 36 percent from $650 two trading days earlier. Tesla’s share price has more than doubled since the start of the year. So why are investors so enthusiastic about Tesla? For Tesla’s bulls, the company has recovered from the rough 2019 and is ready for the rapid development that follows.
In the first half of last year, Tesla burned $1.1 billion because of production and delivery problems with the Model 3. In the second half of 2019, Tesla took a turn for the better. In the fourth quarter, even after capital expenditures, the company generated $1 billion in cash and made a profit for the second consecutive quarter.
Although Tesla reported an annual loss for 2019, similar to previous years, supporters say the company is adjusting its course. Last year, Tesla’s operating costs fell by about 7%, while car sales rose 13% and deliveries rose 50%. In addition, tesla is ready to expand globally as a new Shanghai plant goes into production and another European plant is under construction.
However, Tesla’s valuation has been very high, more than doubling since the end of October. Such a rise in valuations is not just due to the company’s efficiency and new plants, but to optimism about Tesla’s long-term future.
Tesla is focused on the smaller but growing market for battery-electric vehicles, and bulls don’t think it will lose it. In a weekend of research, investment management firm ARK said Tesla’s share price is expected to rise to $7,000 in five years as its profits, falling costs and a fully self-driving taxi network are built.
Even less optimistic analysts say Tesla has proved itself. “Tesla has proven that it can produce cars while producing cash and has the highest profit margins in the industry,” said Pierre Ferragu, an analyst at ew Street Research. He currently has a “neutral” rating on Tesla shares with a target price of $800.
But short-sellers have their own reasons. For example, the company does not seem to be able to get enough cash from car sales to cover costs; it can’t finish production as planned; and Tesla CEO Elon Musk’s actions are often unexpected, such as making statements that have caused complaints from regulators that have forced him to resign as chairman of the company. Critics also argue that Tesla has long been overrated. If financial results are disappointing, share prices can easily be affected. While the recent turnaround has silenced some of the criticism, not everyone is convinced that Tesla has proved itself.
Vicki Bryan, chief executive of Bond Angle, a research firm, is watching to see if Tesla’s recent sales growth can continue into 2020. She said Tesla usually performs well in entering new markets because of customer tax incentives, but it’s hard to sustain rapid sales growth.
In fact, tesla haters are helping to push up its share price. Shorters borrow Tesla stock from brokers and sell them, and intend to buy back shares as Tesla’s share price falls, from which they will be arbitraged. But if the price of a stock rises steadily, higher than the price the short seller originally sold, they will suffer. And if the share price continues to rise, there is no upper limit to such a loss. So if Tesla’s stock rises sharply, short sellers will usually actively buy stocks to stop. If many investors do this, it will push up share prices even further, forcing short sellers to buy more stocks, creating a so-called “short squeeze” effect. This will not only result in losses for the current shorts, but will also prevent new investors from shorting. The surge in Tesla’s share price suggests that a severe short squeeze is taking place.
S3 Partners, a data firm that tracks shorting activity, estimated Monday that the number of shorted Tesla shares has fallen 5 percent in the past 30 days. Although Tesla is still one of the most shorted stocks on the market, it is now shorting much less.
A brief short short squeeze is not the end. If short sellers continue to be skeptical of a company and have enough money to short, they will find another opportunity to short the company’s stock once the squeeze is over.
For now, however, investor slack will only make Musk stronger. The recent surge in share prices has been good for Musk. Since the beginning of the year, his stake in Tesla has earned more than $15 billion.
A big share price jump could also give Musk a big bonus. Under the compensation plan announced in 2018, Musk, who does not receive a salary, will receive more than a dozen large bonuses in the form of stock options, based on a number of operating and performance metrics agreed by Tesla.