Why Shorting Tesla Is Not A Smart Plan For Now Link to the TheStreet.com.
When it comes to Tesla Motor Inc., investing professionals are with it and its visionary CEO Elon Musk. It is no longer a company that was running with various struggles. In the financial market, people love Tesla’s stock even more. It was trading around $40 per share before May 2013 and, as of writing, Tesla closed at $248.13 per share. People are complaining about the valuation, but in my opinion, the company is not due for a serious downside correction when the general market is in favor of the technology sector.
Before we talk about why this not a great short-term idea, let’s take a quick look into its historical price action so we can understand what happened in the past.
Just more than a year ago, Tesla(TSLA) wasn’t as well known. It was some people’s best kept secret. The volume was light and stock was stuck in a directionless trading range for nearly two years.
Until May 8, 2013, when the company reported its first profitable quarter ever, stock jumped during the after market trading session. Volume fired up. Everyone was trying to get a piece of it even if they didn’t have all the details.
Why is this a game changing quarter? Because investors have seen the company show its ability to make money they have to revalue the company based on this updated information. Similar price reaction can be found about Facebook(FB) when it reported better than expected earnings with acceleration in the trending mobile market. This surprise quarter reversed Facebook(FB)’s weak performance.
In the following months, Tesla(TSLA)’s stock continued its monster rally, despite all kinds of questions and doubts related to its much inflated stock price. CEO Elon Musk addressed those concerns by focusing on perfecting the business, which resulted in increased car sales and more ambitious future international expansion. The best-selling Model S received the highest rating for safety from the National Highway Traffic Safety Administration and “Best Overall Driver Experience” from Consumer Reports.
The Tesla’s rally is fueled mostly by the Price to Dream Ratio, meaning by every traditional, fundamental valuation method, the stock is overvalued. People are willing to pay up for the future. Always keep this in mind—an overheated stock doesn’t make it an ideal short target. Here is why:
1. Technically, the trading pattern of Tesla is bullish—traders and investors reacted positively. Stock went up with encouraging reports and any near-term pullbacks were supported by buyers.
Technical analysis is about what and how other people are seeing the stock, not only how you view it. You can see the relative strength in Tesla compared to the broader market.
We all have heard the phrase, “Trend is your friend” and the current trend is up for Tesla.
2. Timing is critical. Don’t try to short a stock just because of what you think is a reasonable price for this stock. You could be right, in the future, but your position might not hold up that long. How Amazon (AMZN)’s stock has behaved is another example that stock goes up even the fundamental earnings is unstable, as long as the company is in dominated position.
3. Don’t short a company that has a “problem” all other companies wish they had. “Even though we (Tesla) increased both production and deliveries, average global delivery wait times increased because our production growth was unable to keep pace with increased demand,” said Elon Musk in Tesla’s Q2 Shareholder Letter. Does this remind you of Apple(AAPL)’s stock rally before?
TSLA is not a short stock for the foreseeable future and looking to engage with the stock on the long side has a higher probability when you are on the right side of the trade.