Small investors hastened to get on board, with Robinhood stock trading saying the number of accounts holding Tesla stocks has doubled since June.
Analysts are often afraid to call a bubble, given the potential to egg on their faces, but the stock’s surge to over $ 1,500 (after briefly surpassing $ 1,700 on Monday) has made even Tesla optimists. The company’s valuation is more than 60 times higher than analysts’ average expectations for core earnings in 2020. This multiple implies that Tesla will not only become profitable, but become the dominant automaker in the world. Many do not think it will last.
“It’s an irrational bubble,” said Matthias Schmidt, an automotive analyst who covers electric vehicles, “or perhaps more appropriate a massive tidal wave of investors investing irrationally in a brand with little knowledge of the business as savvy and experienced market investors, perhaps going against all their rational financial experience, take advantage, don their wetsuits and ride the Tesla wave, raising the price even more .
Analysts at Evercore ISI, an investment bank, made reference to tulips in a note posted on Tesla this week – an allusion to the tulip craze that is part of edifying tales for investors in any asset that benefits from such explosive price growth.
Yet, as Evercore analysts note, even if Tesla’s valuation seems “dislocated from traditional valuation measures,” predicting whether and when it will return in line with the bottom line of the business is a tricky proposition.
It is also potentially costly. The short sellers borrowed $ 20 billion worth of Tesla stock – the largest short sale ever – to resell it in the hope that prices will fall. These investors hope to buy back the shares after the price drops, but rapid increases in the share price can mean they are forced to give up their bets with a painful loss.
Musk didn’t bother to hide his glee at the discomfort of short sellers: Earlier this month, he sold a batch of red satin “short shorts” on Tesla’s website at 69,420 $ – a price deliberately tied to the “4/20” date many people celebrate cannabis use. Musk previously used the number in 2018 when he said he agreed to a Tesla buyout at $ 420 per share.
The tactile paper under the rising stock price was lit in October, when the company surprised many investors with quarterly profit and a bullish outlook. The stocks suffered in March when the coronavirus pandemic struck, but recovered after Musk – drawing barrage of criticism that he was putting workers’ health at risk – kept his California factory open.
Tesla delivered more than 90,000 cars to its customers in the second quarter of 2020 – exceeding expectations despite the disruption caused by the coronavirus pandemic to production and huge job losses in several of its major markets. Tesla has also made progress in expanding its Shanghai plant to serve China, the world’s largest automotive market.
The move in the share price has left some analysts scrambling to follow. Piper Sandler analyst Alexander Potter this week raised his target price for Tesla from $ 939 to $ 2,322, citing faster-than-expected market share gains, as well as the possibility of charging subscription fees for fully self-contained software updates – a technology considered for a few years. a way.
The company has also shown its commitment to continuously innovate and has gained an impressive advantage through its network of proprietary charging points, said Alyssa Altman, consultant to transport and mobility companies at Publicis Sapient.
However, many auto analysts remain skeptical. Tesla had an “open goal” in North America and Europe, where major automakers were unprepared to market electric cars, Schmidt said. That has changed in Europe thanks to the new limits on carbon dioxide emissions. Volkswagen and the Renault / Nissan alliance have both sold more electric cars than Tesla in Europe this year as they race to catch up.
Tesla’s aggressive tactics also make her more vulnerable than more conservative incumbents to the scandal. A German court gave a photo through Tesla’s arcs this week, ruling that the company’s description of driver assistance functions as “autopilot” was misleading. Governance issues – like looking at Musk’s Twitter feed for securities law violations or potential defamation – are also a big problem for a company so intimately linked to the personality of its billionaire boss.
Then again, a separate analysis by Piper Sandler suggests that Tesla’s mentions on the newscast are “quite strongly” correlated with a higher share price. Controversy can pay off, regardless of Tesla’s chances of dominating the auto industry.