3 reasons for the rise in Tesla shares
On January 27, in an article on Stock News, I highlighted the value differential between Tesla (TSLA) and a combination of General Motors (GM) and Ford (F). By late January, the market capitalization of Tesla had grown to over $17 billion over a combination of General Motors and Ford.
At the time I published the piece, TSLA shares were at $545.25 and had already gained 30.34% in 2020. The shares closed at $418.33 on December 31, 2019. As I wrote that piece, I was bullish on the prospects for Tesla Motors (TSLA). I wrote, “Mr. Musk is not the typical billionaire; he is a man who will go down in history as one of the most significant innovators of his time.” Meanwhile, I never imagined that Tesla shares would experience one of the most explosive moves in history over the next two weeks.
Tesla beats expectations- The stock goes parabolic
After beating analyst estimates by an incredible $2.28 per share in Q3 2019 and reporting a profit of $1.86 versus a loss of 42 cents, Tesla (TSLA) did it again in Q4. Elon Musk’s EV company told markets that it earned over $2 per share in the final quarter of 2019 compared to consensus estimates of $1.72 per share.
Tesla (TSLA) reported Q4 earnings on Wednesday, January 29. At the same time, the company set a goal to sell more than 500,000 EVs in 2020. The news lit a bullish fuse under the price of TSLA shares.
Source: Barchart
As the chart shows, the price of the shares rose from a closing price of $580.99 on January 29, which was a significant gain from $418.33 at the end of 2019. Meanwhile, the stock took off like a rocket ship rising to a high of $968.99 on February 4 before correcting to a closing price of $748.07 per share on Friday, February 7. The price of TSLA shares more than doubled from December 31 at the high but was still an astounding 78.8% higher as of the close of business at the end of last week.
Three reasons for the rise in Tesla shares
Tesla (TSLA) shares rose as the company beat earnings estimates for the second consecutive quarter, which is the first reason that the stock has been moving to the upside in 2020. However, the second factor led to the extraordinary rise in the price of the shares. The short interest on TSLA stock included positions in not only the shares but in a high level of open interest in call options on the stock. As TSLA began to rise, shorts began to scramble to cover their risk positions. The higher the price rose; the less stock was available to the shorts. Mr. Musk is a controversial genius, and more than a few analysts and risk-takers had bet that he would run out of cash before Tesla (TSLA) would show a profit. In the last piece, I wrote that Tesla had left the other automakers with egg on their faces. The recent move left any TSLA detractor who put their capital at risk in the poor house.
The final reason for the wild ride in the stock was that portfolio managers and technical traders wound up buying TSLA shares as the market cap of the company rose. At the end of last week, it stood at $137.453 billion. An average of over 15 million TSLA shares changes hands each day.
Ford and GM-Weak performance following earnings
General Motors (GM) also beat analyst estimates for the fourth quarter as the company reported earnings of five cents per share versus one penny.
Source: Barchart
GM shares fell from $36.60 at the end of 2019 to $33.63 last week, a drop of 8.1%. GM’s market cap fell to $47.097 billion at the end of last week.
Ford Motor Company (F) did not fare as well as GM or TSLA as the company reported earnings of 12 cents versus consensus estimates of 15 cents per share.
Source: Barchart
Ford (F) shares closed 2019 at $9.30 and were trading at $8.11 on February 7, a decline of 12.8%. Ford’s market cap on Friday was $31.923 billion. The combined value of GM and Ford as of the end of last week was $79.02 billion, under 58% of Tesla’s market cap. Even though the stock market has rallied since the end of last year, GM and F shares are significantly lower.
The price action in TSLA shares is a lesson for any market participant considering a short position in a stock. When everyone scrambles for an exit at the same time, the result can be carnage. Mr. Musk is not only the leader of the US car markers, but even his critics realize he has achieved legendary status, and they are not likely to bet against him again. The valuation gap between TSLA and a combination of GM and F moved to over $58 billion at the end of last week.
TSLA shares were trading at $760.05 per share on Monday afternoon, up $11.98 (+1.60%). Year-to-date, TSLA has gained 81.69%, versus a 3.48% rise in the benchmark S&P 500 index during the same period.
Author: Andrew Hecht