When a stock increases by more than 500% in a year, it is not a bad time to think about a safe exit. Investors in Tesla (NASDAQ 🙂 may have been doing this kind of calculation lately, after the spectacular rise in electric vehicle maker shares over the past 12 months.
After Tesla hit a record high of $ 1,794.99 on July 13, the stock lost about 17%, sparking speculation that this relapse could be the start of a larger correction that many top analysts had recently warned. Tesla shares traded at $ 14.84.57 at the time of writing, down about 4% on the day.
The recent report, which more than doubled the value of the stock in three months, was boosted by a few encouraging updates from CEO Elon Musk this month.
First, the company's quarterly sales data indicated that Tesla delivered 90,650 cars to customers in the three months ended June, exceeding the average analyst estimate for approximately 83,000. Tesla managed to achieve that impressive feat, even when the main factory in California was shut down for much of the spring by the pandemic.
After these sales numbers, investors expect Tesla to report another positive result when it reveals this on July 22, which would make it the fourth profitable quarter in a row. If that happens, Tesla may qualify for inclusion in the world's most-tracked index. That possibility sparked another crazy rush to charge Tesla stock before all index trackers were forced to buy it.
At least $ 1.6 trillion in mutual and exchange-traded funds follow the S&P, according to Morningstar Direct data. A company must report an accumulated profit over four consecutive quarters to be included in the index. Tesla's earnings in the past three quarters mark the longest profitability to date.
A Speculative Frenzy?
In the future, the big question for Tesla enthusiasts will be this: What other sources of news could continue to fuel that rally?
According to some analysts, this could be: an announcement to enter the Indian market, an electric mini-car launch and the possible entry into the S&P 500. But the problem is that these possibilities are already in the current stock of the stock have been processed. appreciation. Tesla shares are now trading at 182 times the estimated 12-month profit, versus 10 times for General Motors (NYSE :).
Tesla's recent rise brings a market value of more than $ 275 billion, which is more than Ford (NYSE :), GM and Fiat Chrysler (NYSE 🙂 combined.
These figures clearly show that Tesla is in the throes of a speculative frenzy and a small negative surprise could cause a major downward movement. Tesla's shorting has turned out to be the worst nightmare for many investors this year, but there is still a huge crowd looking to see a drop in the stock. The value of bearish bets on Tesla has risen to almost $ 20 billion.
Adam Jonas, Morgan Stanley's widely followed auto analyst, said on Friday that "the days of Tesla's virtually undisputed dominance can be counted." He has an underweight in the stock and a price target of $ 740, which is 52% lower than where the stock closed on Thursday.
In our opinion, Tesla's valuation remains impossible to justify by any standard measure and clearly demonstrates the herd mentality of both private and institutional investors. There is no doubt that this strategy has brought in huge rewards, but it is wise to reverse some risk and enjoy the profit.
Bottom Line
Shorting Tesla has turned out to be a losing bet this year, but investors should be aware that the company's stock is now probably priced to perfection. As such, it's not a bad idea to get some risk off the table before the company's second-quarter earnings are made.
Remember that Tesla & # 39; s journey to the current level was no straight line higher. Since 2018, there have been two waves of sales, each beating investors, as the stock has fallen by about 50% each time.
