With shares trading for over $300 apiece, Tesla Inc (NASDAQ:TSLA) recently surpassed Ford to become the second-largest American automaker by market cap, second only to General Motors.
Tesla’s recent rally comes after better than expected vehicle deliveries put the electric car manufacturer on track to deliver up to 50,000 vehicles in the first half of 2017. On top of this, Tesla is preparing to launch its mass-market Model 3 sedan, and it plans to produce half a million of the vehicles annually.
But Tesla is a complicated investment that shouldn’t be taken at face value. The company is what I like to call a ‘battleground’ stock. Investors either love it or they hate it. This dichotomy shows in the stock price. Tesla’s valuation is astronomical, and so is its short interest. The company’s long-term outlook will depend on market sentiment more than fundamentals.
There’s no denying that Tesla is expensive compared to other American automakers. Take Ford, for example, the $45 billion company Tesla recently surpassed in size.
Ford generates a whopping $150 billion in annual revenue while Tesla only generates $7 billion. On top of this, Tesla is still unprofitable. The firm loses hundreds of millions each year and often relies on dilution to raise capital.
So with this in mind, it’s not surprising that Tesla is one of the most heavily shorted mega-cap stocks in the market. Short interest represents almost 20% of all shares outstanding.Yet, despite having the fundamentals on their side, Tesla bears are getting clobbered.
Why Shorting Tesla is a Mistake
Stocks are worth whatever people are willing to pay for them, and Tesla short sellers learned this lesson the hard way.
Despite Tesla’s massive short interest, the stock continues to soar to new highs because the bulls continue to believe in the company, and refuse to sell.Tesla bulls don’t worry about how expensive the stock is compared to other automakers because they don’t care.
They believe in the company, its product, and its leadership- and that is enough to keep them buying the shares in the company. For these investors, auto manufacturing is just the beginning of the iceberg for what they believe will become a clean energy empire.
So long as Tesla is backed by die-hard investors, it will be very difficult for the company to fail. If Tesla needs to raise money, all it has to do is sell more stock and rake in billions.
Tesla is a unique investment because the fundamentals say it’s overvalued, but investors don’t care. The stock is a battle between the bulls and the bears, and so far, the bulls are winning. Where should you side? That depends on how much of a believer you are.
Are you willing to hold your shares no matter what anyone says and ride through potentially difficult times without getting discouraged? If so, you will fit right in with Tesla investors.
As for me, I believe shorting the company is a grave mistake. But I’m not quite willing to go long – yet. Luxury automobiles are a hugely cyclical industry. I would like to see how Tesla’s sales hold up in a recession before I consider a position in the stock.
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