Tesla, the maker of electric cars, closed at $887 on Tuesday, up 36 percent from $650 two days earlier. Tesla’s share price has more than doubled since the start of the year. You can attribute this growth to the seemingly unbridled enthusiasm of Tesla supporters, for whom Elon Musk, Tesla’s chief executive, is a hero.
But Tesla’s shorts also seem to have played a role: after betting that the company would collapse, the share price fell sharply, and many people seemed to be reducing losses through buy-to-let deals, which actually pushed up the share price.
Why are investors so enthusiastic about Tesla?
For those who are bullish on Tesla, Tesla has recovered from a tough start to 2019 and is going well.
Tesla burned $1.1 billion in the first half of last year because of production and delivery problems with the Volkswagen model 3, but things improved in the second half of 2019. In the fourth quarter of last year, after deducting capital expenditures, Tesla generated $1 billion in cash revenue and made a profit for two consecutive quarters.
While Tesla is still losing money for the whole of 2019, supporters say the company’s course of development has been corrected. Tesla’s operating costs fell about 7 percent last year, car sales rose 13 percent and deliveries rose 50 percent. They argue that Tesla is expanding in the global market as the Shanghai superplant begins to produce electric cars and Europe begins to build another superfactory.
Tesla’s share price has more than tripled since late October. The company’s high valuation is not just due to improved operational efficiency and the construction of new plants, but rather to give the market a bet on Tesla’s future.
Tesla has locked in a small but growing market for all-electric vehicles, and bulls are confident that the company will not lose it. IN A REPORT OVER THE WEEKEND, INVESTOR MANAGEMENT FIRM ARK SAID IT EXPECTED TESLA’S SHARE PRICE TO SOAR TO $7,000 OVER FIVE YEARS BECAUSE IT BELIEVED IT BELIEVED IT COULD CONTINUE TO INCREASE PROFITS, CUT COSTS AND BUILD A FULLY AUTOMATED CALLING NETWORK. Even less optimistic analysts say Tesla has proved itself.
“Tesla has proven that it can generate cash while making cars and has the biggest profit margin among its peers,” said Pierre Ferragu, an analyst at New Street Research, a market research firm. “But Ferraju has a neutral rating on Tesla’s stock, with a target price of $800.
What about Tesla’s critics?
There are several reasons to short Tesla stock.
The company doesn’t seem to be able to get enough cash from car sales to cover its costs; there are real problems in producing and delivering cars on time; Musk’s actions are so unusual that some of his comments have drawn regulatory scrutiny and led to his resignation as Tesla’s chairman. Critics say Tesla’s share price has long been overvalued and could be hit if its financial results disappoint.
The recent improvement in performance seems to have calmed the criticism, but not everyone is convinced that Tesla has proved itself.
Vicki Bryan, chief executive of Bond Angle, a market research firm, said she was waiting to see if the near-term sales growth at Tesla could continue into 2020. She said Tesla had performed well in entering new markets, often benefiting from local tax incentives, but had struggled to maintain its rapid and sustained sales momentum.
It has also been pointed out that recent safety issues have demonstrated Tesla’s lack of quality control.
How did the short-stakes Tesla push up its share price?
Investors who are shorting Tesla’s stock are helping to push up the share price. The investors borrowed Tesla’s stock from a stockbroker and sold it in the hope of buying back the stock and returning it to the broker when Tesla’s share price fell. The difference between the price at which they sell the stock and the lower bid price is the profit.
But if Tesla’s prices rise steadily, exceeding the price that shorters initially sold, they would suffer. If a big rise like Tesla’s, shorters will often have to rush into buying stocks to protect themselves from further losses. If enough investors do so, it will push up share prices further and force shorts to buy more shares.
This effect, known as “forced short”, not only causes losses on existing short positions, but also prevents new investors from shorting the stock. The near-vertical movement of Tesla’s share price suggests that a particularly dramatic “short” market is under way.
S3 Partners, a data firm that tracks shorting behavior, estimated Monday that the number of Tesla’s shorted stocks has fallen 5 percent in the past 30 days. Despite its smaller shares, Tesla shares remain one of the most shorted stocks on the stock market.
“Forcing The Sky” is not always the end of the story. If shorters continue to be skeptical of Tesla, while still having the guts and money to short the company, they will look for opportunities to short the company’s stock again after the “short” ends.
For now, this shorting will only make Musk stronger.
The recent rally has been a big boon for Musk. Since the beginning of the year, he has earned more than $15 billion from his tesla stock holdings.
Rising stock prices also bode well for Musk, who is eyeing the next big bonus. Musk is not paid under a compensation plan announced in 2018, but as Tesla achieves various operational and performance goals, he will receive a dozen large bonuses in the form of stock options.
Last month, a bonus was released with the company’s market capitalisation of $100 billion, but Musk will only receive it if Tesla’s valuation is maintained. Fortunately, Tesla’s current share price provides him with a considerable cushion.
If Musk gets the bonus on Tuesday and exercises the option, the return will be more than $900 million.