Is Tesla a Bubble?

Is Tesla a Bubble?

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Let’s talk Tesla.

Over the last month the stock is up 155% and around 232% YTD. Such an amazing performance in this pandemic seems unbelievable.

But what is this surge backed by? Is it just a bubble or is there actual data to justify to massive 258 billion dollar market cap of Tesla making it the world’s largest automaker (Beating Toyota)? This massive surge in the stock has definitely help Musk, making him the 7th richest person in the world, along with a lot of Tesla employees.

Why is the stock rising?

Watch my YouTube video on Tesla for a more detailed case Study.

There are a few reasons behind it. No stock rise significantly without a probable cause. The first one is Short Covering. Tesla was the most shorted stock in the US multiple times. There were around 20 billion dollar worth short position which were lowered to 10 billion and finally to around 6 billion dollars in May 2020.

When you close a short position you buy back the shares at the market price causing it to rise. When there is a sudden rise in the stock a lot of Short sellers close their positions causing the stock to rise even further.

This attracts more speculators, them buying causes a big spike. But that’s not all. The news about Tesla starting a new manufacturing plant in Asia is definitely helpful for the stock price.

Finally, let’s talk about the greatest news (speculation) Tesla being added to the S&P 500.

This could be huge for Tesla.

The S&P500 is worth around 27 trillion dollars, making it the largest and the most valued index. Around 4.3 Trillion Dollars are injected into the S&P500. So, if Tesla gets added into the S&P500 there will be heavily buying by fund managers causing the stock to spike.

That’s a reason why there is a lot of speculation around Tesla. People are trying to make a quick profit. i.e buying today, waiting for the announcement, and when it is announced, the stock will rise and they’ll sell it for a quick profit.

But what are the chances of Tesla being added to the S&P500? To find this, I’d to look into the SEC guidelines for the rules for adding a company.

  1. The company must be originated in the US.
  2. The stock must be listed for over 1 year since its IPO.
  3. The market cap must be above 8.2 billion dollars (Feb 2019).
  4. Most of its shares must be in public hands.
  5. The company must report 4 consequently profitable quarters with the latest being profitable as well.

Tesla checks 4/5 boxes. The first four are easily cleared. But the last point makes it not good enough to be listed in the S&P500.

Tesla isn’t a very profitable company. Just look at the P&L sheet of Tesla on any website such as Yahoo Finance and you’ll know.

Tesla isn’t making money. And that’s the problem with a lot of tech companies. They’re funded by ACs/VCs and are listed at extravagant valuations but they don’t make any money.

The Intrinsic Value.

What is the fair value of Tesla? I don’t know.

Finding the intrinsic value of a company isn’t an easy task, but it gets even harder when you have a company like Tesla. You cant really compare it to traditional automakers. But if you want to know more about how to value Tesla, watch this video.

According to some companies the fair value of Tesla is 1000 dollars. Some say that it’s 295 dollars or 700 dollars. Some say that it is 2000 dollars 2322 dollars. According to a company the fair value of Tesla was 7000 dollars!

What should you do?

If you’re a stock holder of Tesla motors, what can you do? My strategy would be to sell 33% of my position at the market price.

I’d hold the remaining 67% shares. If Tesla got listed in the S&P500, a big spike could be seen, I’d offload 50% of my position then. I’d be left with around 17% shares. I would hold on to those shares for the long run.

If the stock falls great! You’d have booked 33-50% of your position. So you made a decent profit in this “Bubble”.

If the stock rises, great! You still have 17-50% of the shares. You can ride the rally. Of course, this method wont give you the highest amount of profit possible, but it’ll definitely give you a very good profit compares to the risk.

Timing the market is extremely difficult, probably impossible. It’s better to leave money on the table than to lose money.

Should you short Tesla?

Hell NO. Shorting a stock can be extremely profitable, but it requires extremely good skills. You profit is limited while the loss is unlimited.

When Tesla went from 400 to 700 a lot of people shorted the stock, even though it seemed extremely overvalued, it still went from 700 to 1500-1600ish range. No one can tell the exact top of a stock.

-Vikrant C.

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