Why Tesla’s share price has jumped 36 per cent in two days


Here’s what’s happening

Why are investors so enthusiastic about Tesla?

To the bulls, Tesla is positioned for greatness now that it has recovered from a rocky start to 2019.

After burning through $US1.1 billion ($1.6 billion) in the first half of last year as it struggled with the production and delivery of its more affordable Model 3 car, Tesla turned a corner in the second half of 2019. In the fourth quarter, it generated $US1 billion in cash even after capital expenditures and posted its second straight quarterly profit.

Even though Tesla posted an annual loss for 2019, as it has every year, its backers argue that the company has corrected course. Operating costs were down about 7 per cent last year, while automotive sales were up 13 per cent, and deliveries rose 50 per cent. With a new Shanghai factory producing vehicles in China and another under construction in Europe, Tesla is also poised for global expansion, they say.

But the company’s sky-high valuation — which has more than tripled since late October — is about more than improved efficiency and new factories. It’s a bet on Tesla’s future.

The company has a lock on the small but growing battery electric vehicle market — and the bulls believe Tesla’s not about to lose it. In a note over the weekend, ARK, an investment management firm, said it expected Tesla’s share price to soar to $US7,000 in five years based on a belief that Tesla can increase profits, decrease costs and build a fully autonomous taxi network. Even less-exuberant analysts say the company has proved itself.

“Tesla has demonstrated that it can build cars while generating cash and with best-in-class profit margins,” said Pierre Ferragu, an analyst at New Street Research. His rating on the stock is neutral, however, with a price target of $US800.

What about Tesla’s critics?

There have been several reasons to bet against Tesla’s shares.

The company seemed unable to generate enough cash from car sales to cover its costs. It was having real problems producing cars on time. Musk behaved in unorthodox ways, including making remarks that courted scrutiny from regulators and resulted in his stepping down as Tesla chairman. And according to critics, Tesla has long been overvalued, leaving the stock vulnerable if its financial results disappointed.

Investors betting against tesla have been burned. Credit:Bloomberg

The recent turnaround seems to have quieted some of the critics, but not everyone is convinced that the company has proved itself.

Vicki Bryan, chief executive of Bond Angle, a research firm, said she’s waiting to see whether recent sales growth can continue through 2020. Tesla, she said, does well when it enters new markets, often benefiting from customer tax incentives, but then struggles to keep sales growing at a fast rate.

Others point to recent safety concerns as evidence that Tesla’s quality control is lacking.

How are Tesla’s haters driving up its share price?

Investors that bet against Tesla’s stock are now helping to drive it far higher. A look at the mechanics of these bets, known as short sales, explains why.

The investors borrowed Tesla shares from their brokers and sold them, hoping to buy back the shares and return them once Tesla’s stock price declined. The difference between the price at which they sold and the lower purchase price would be their profit. A short seller who borrowed a Tesla share, sold it at $US300 and then bought it back at $US200 would make a $US100 gain (not counting the costs of the trade), for example.

But if a stock rises steadily above the price at which the short-sellers initially sold it, they are sitting on a loss. That loss — in theory — has no limits because a stock can keep rising. And if a stock zooms higher, as Tesla’s has, the short-sellers will usually have to rush to buy the shares to protect themselves against further losses. If enough investors do this, it pushes the stock price up even further, forcing even more buying by short sellers. Other investors often join the buying, in the belief they can make quick and easy profits.

This effect, known as a short squeeze, not only creates losses on existing short bets but also deters new investors from betting against the stock. The almost vertical trajectory of Tesla’s share price suggests that a particularly acute short squeeze is in progress.

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S3 Partners, a data firm that tracks short selling, estimated Monday that the number of Tesla shares sold short had fallen 5 per cent in the previous 30 days. Tesla’s stock is still one of the most shorted stocks on the stock market, though much less so than it was in the recent past.

Short squeezes are not always the end of the story. If short sellers continue to have doubts about a company, and still have the stomach and wherewithal to bet against the company, they will look for an opportunity to sell the shares short again once the squeeze is over.

The New York Times

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