What's Behind The 'Parabolic' Rise In Tesla?

The meteoric rise in Tesla Inc TSLA stock has shown gravity-defying momentum, and it's difficult to attribute the strong upside merely to fundamentals, according to GLJ Research's Gordon Johnson.

The Tesla Analyst: Johnson has a Sell rating on Tesla with a $19 price target. 

Options Trade, Passive Buying Lift Stock: A bubble is building in astructurally broken U.S. market, Johnson said in a Tuesday note.

"That is, a [$30-trillion] stock market is being moved by a few billion in options activity daily," the analyst said. 

Asian buyers who want exposure to big U.S. tech are buying options via principal protected notes overnight, comprising "way out of the money puts and less way out the money calls," the analyst said.

This leads to dealers buying stocks in order to write the call portion of the straddle trade, forcing index futures to hedge, he said. 

This widens the spread between the bid and ask because it is a massive one-sided option market, resulting in a spike in volatility, Johnson said. 

The analyst said investors should watch for two events: a large gap up that triggers a mass liquidation of options, forcing dealers to sell stocks and futures and resulting in a crash; or a large gap down that triggers a liquidation. 

Another factor at play is passive investing taking over from active investing, with BlackRock, Capital Ventures and State Street being among the major buyers, he said.

The mutual funds buy whatever is in the index irrespective of the valuation, Johnson said. 

These dynamics are driving Tesla shares and the broader technology space higher, the analyst said. 

What to Expect From Tesla's Q3: Tesla is likely to deliver 139,961 cars in the third quarter and 173,787 cars in the fourth quarter, taking full-year deliveries to 494,848 cars, Johnson said in the note.

GLJ Research expects "another rabbit-out-of-the-hat" third quarter and for the consensus to be "bedazzled" by Tesla's "magic show," the analyst said. 

He forecast deliveries of 533,400 vehicles in 2021, a year when Johnson said Tesla will face "unprecedented" EV competition. 

The analyst estimates revenues of $8.6 billion and EPS of 22 cents for the third quarter, factoring in credit sales of $203 million for both the third and fourth quarters; 75% recognition of the 100% gross margin FSD revenues the company estimates for the next 12 months; and an auto gross margin of 22.2%,

TSLA Price Action: Tesla shares were down 6.11% at $446.02 at the time of publication Wednesday. 

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Photo courtesy of Tesla.