Teslamania Runs Wild! Now What?

Tesla Inc TSLA has been running in insanity mode this week. Shares dropped more than 17% on Wednesday, the stock’s second worst day in history. The sell-off came just two days after the stock hit an all-time intra-day high of $961.86 and gained 19.9%, its single best day in more than six years.

Tesla seems to be the latest mania on Wall Street, at least for the time being. But some experts are making the case that Tesla’s 242% gain in the past six months is fundamentally justified and there is even more upside ahead.

The Tesla Bull Case

ARK Investment Management recently raised its 2024 price target for Tesla to $7,000.

“This is an exponential growth company. We’ve lived in a linear growth world for so long. With the law of large numbers pulling growth rates -- this is a prime example of exponential growth,” said Catherine Wood, CEO of ARK Invest.

Tesla recently reported fourth-quarter revenue growth of 2% on the strength of 15.4% quarter-over-quarter delivery growth.

On Wednesday, CNBC's Jim Cramer expects Tesla will eventually get back above $968. "Maybe it will take a while, but when it gets back there, I bet it keeps climbing," he said.

Loup Ventures' Gene Munster said Tesla has been repriced from an auto stock to a tech stock, a move that he said is “justified.” However, investors should be careful buying the stock at recent levels.

“The excitement driving such a dramatic rise presents short term risk,” Munster wrote.

Cascend Securities' Chief Investment Strategist Eric Ross said this week that Tesla should strike while the iron is hot with a large equity raise.

“With $13.5 billion in debt, a $20 billion raise would dilute valuation by roughly 13.5%," Ross said. Cascend has a Buy rating and $750 target for Tesla.

Tesla Short Sellers Eat $8.3B Loss So Far In 2020

The Tesla Bear Case

Many Tesla experts call into question Tesla’s explosive move given very little has changed about the company’s underlying fundamentals.

Needham analyst Rajvindra Gill said Wednesday that “irrational exuberance” surrounding Tesla has reached an all-time high.

“While we acknowledge the fundamentals have improved, we remind investors the following: 1) TSLA has never posted a full annual profit since going public; 2) its growth rate decelerated in '19 and 3) GAAP gross profit increased only $27MM despite revenue increasing $3.1BN in '19,” Gill wrote in a note.

Needham has an Underperform rating for Tesla.

DataTrek Research co-founder Nicholas Colas addressed a practical indicator of the Tesla euphoria.

“‘Buy Tesla stock’ is now the #1 autocomplete suggestion for the Google query ‘should I…’. That’s pretty much all you need to know about this move,” Colas said.

NYSE Executive Floor Governor Jay Woods tweeted that Tesla mania hit home for him this week when he had to discourage his 14-year-old son from buying Tesla stock at the top of a bubble.

Actual dinner conversation...

Son (14).. "Dad, can I buy a stock?"

Me.. *Smiles proudly, then thinks a bit more... "Please don't say $TSLA"

Son.. "How did you know?!! All it does is make money!!"

This is the top...

— Jay Woods (@JayWoods3) February 6, 2020

VGI Partners Global Investments portfolio manager Robert Luciano said Tesla’s “punch bowl has been aggressively spiked.”

“When a market cap of that size can go hyperbolic in a short period of time for no real reason, it is certainly symptomatic of an environment that is not normal,” Luciano said.

Gina Sanchez, founder and CEO at Chantico Global, told CNBC that “mania” seems like an appropriate word.

“It feels like a mania. If you look at its forward earnings, it’s 110 times forward earnings,” Sanchez said.

Seabreeze Partners Management president Doug Kass took a crack at putting the Tesla mania in perspective on Twitter.

Today 47 million shares of $TSLA traded at an average price of $750/share - equating to a nominal value of $35 billion.
That was greater than 1.6x the nominal value of Spyders traded ($22 billion) and over 1.5x the nominal value of $AMZN and $AAPL trading combined today.
.

— Douglas Kass (@DougKass) February 4, 2020

Analysts such as Barclays analyst Brian Johnson have been drawing comparisons between Tesla and the dot-com bubble.

“Not to sound like an ‘Ok, Boomer’ to the younger investors rushing into TSLA share, but the recent price action brings to mind NASDAQ c. 1999,” Johnson wrote this week.

What’s Next?

Market manias can be extremely difficult to time and predict, even for the most experienced traders.

Roughly 67.3% of Tesla-related messages on StockTwits have been bullish on Thursday, down from 79.1% on Monday. However, daily message volume related to Tesla has spiked dramatically from between 600 and 800 messages per day as recently as October to more than 21,600 messages on Tuesday.

Looking ahead, Wall Street analysts see Tesla stock coming back down to earth at some point. Among the 27 analysts that cover Tesla, the average price target is $506, roughly 34.7% below its current level.

Tesla's stock traded around $743 per share at time of publication.

Photo illustration by Nathan Karinen.