The Playbook For The Modern Man

Stock Jump After Elon Musk ‘Prediction’ Betrays The Real Problem With Tesla Shares

Is the high wearing off?

Entrepreneur. Huckster. Genius. A lot of words are thrown around when trying to describe Elon Musk. But whether you think Tesla’s co-founder, CEO and product architect is an idiot or a savant (or both), Elon Musk’s cultural impact is hard to deny.

As is his presence on social media, with every wayward Tweet (Tesla’s stock price temporarily plunged in May after Musk said its value was “too high”) and every ‘free-thinking’ move on a podcast (Musk had a puff on a joint with Joe Rogan in 2018) earning Musk ever more adoration from his fans and ever more lambasting from his critics.

Summed up, his admirers see him as an unfairly maligned, awkward, socially relatable genius, and his haters see him as an infuriatingly revered con-man.

But we’re not here to compare Tesla’s real vehicular value with the stiff competition it is set to face from the likes of VW (which, some investment managers believe, just needs to “flick a few switches” before being able to able to produce electric vehicles “much more efficiently, much cheaper and in greater numbers than Tesla”).

We’re here to talk about whether Tesla stocks are, relatively speaking, a solid investment (with the obvious aside that no individual stock or company is – on its own – a solid investment compared to a well-balanced portfolio).

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This comes as Elon Musk said Tesla’s valuation is high but will be worth more in five years, on an episode of The New York Times’ Sway podcast released on Monday.

“I think some critical mass of the market has concluded that Tesla will win, I guess. I mean I’ve gone on record already saying I think the stock price is a bit high, and that was well before the current level,” Musk said. “But also if you ask me, do I think if Tesla will be worth more than this in five years? I think the answer is yes.”

RELATED: Crucial Rules For The New Generation Of ‘Pandemic Investors’

As Business Insider reported yesterday, “Tesla is trading 760% higher than it was 12 months ago.” The stock is also up roughly 400% year-to-date and it currently has a market capitalisation “of over $US380.2 billion larger than Ford, GM, and Fiat combined.”

Tesla shares have historically been sensitive to Musk’s public comments. In May, his tweet that the stock was “too high” drove the share price down as much as 12%, Business Insider reports.

“Musk also commented on what some traders saw as a less-than-exciting ‘battery day’ last week. Shares fell as much as 9% last Wednesday when Tesla revealed its next-generation battery cell technology won’t be as cost-efficient as some initially thought,” they continued.

On Monday, the day Musk made his positive five year prediction for Tesla, “The electric-vehicle company rose as much as 5% during… trading hours,” Business Insider also reported.

However, as DMARGE sees it, even this positive jump in price is yet more evidence that Tesla’s current stock price is like a mountain with a tonne of snow on it – there may (or may not) be real, rock hard value underneath, but the top layers are unequivocally loose.

James Whelan, Investment Manager at VFS Group in Sydney, told DMARGE earlier this year that “Tesla [is] running at something like 230 times the price to earnings ratio; the price of Tesla is 230 times what it earns on a per-share basis.”

“That’s insane.”

“The market as a whole was trading at 23/24 times [the price to earnings ratio] last week, before the pandemic hit it was trading at 17; the average amount the market as a whole trades at is usually around 14 or 15.”

“Quite frankly I just don’t like to be a part of very bubbly stocks because when the rug gets pulled out it gets pulled out really hard.”

Whelan told DMARGE that “smart money would… buy copper or lithium. That way you don’t have to choose between Tesla, VW, Porsche or Toyota.”

“They’re all going to go to electronic vehicles, so I’d just buy lithium; it’s used in the batteries, or copper which is used in [practically] every part of the electronic vehicle. Then I don’t really care who wins this fight, I know that if they both win, I’ll win.”

“Even if they both lose I’ll still probably win.”

“I don’t want to have to worry about Elon Musk’s dodgy 4 am tweets, I’d rather just own a commodity that’s going to benefit from an electronic revolution, isn’t that easier?”

Another factor at play, hiking up the bubble, Forbes suggests, is short squeezing. This happens when investors short Tesla, only for their bet not to pay off (and for them to be forced to buy Tesla shares and return them to their broker).

As Forbes reports, “The higher stock price wipes out even more short sellers, which in turn drives the stock price even higher. This repeats again and again, sending the stock price to bananas levels. And this vicious cycle is what we call a ‘short squeeze.’”

“The dollar value of all shorted Tesla shares is close to hitting $20 billion. No US stock in history has ever been that shorted.”

“For perspective, Apple AAPL +0.3%, the second-most shorted stock in America, has 13 billion dollars’ worth of its shares shorted. But… the company is 14 times bigger than Tesla.”

“The sheer magnitude of short sellers put Tesla at risk of being caught in a short squeeze of historic proportions.”

That’d certainly get investors reaching for a different type of green…

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