Tesla stock price is set to rich all time high of $1900 ahead of the announced 5 for 1 stock split, but is the near vertical rally sustainable?
This rally is made even more incredible when you consider that Tesla stock was worth a mere $361 in March 2020 and $420 at the start of the year, meaning that a single share bought in March would now net an incredible $1,526.09 profit. The colossal 422% rise is based on several factors, including forecast beating Q1 and Q2 reports, increased production and great numbers coming out of China.
Tesla Energy is also making great strides, installing countless residential, commercial and utility size power packs in North America, Britain, Australia and Qatar. In fact, Elon Musk recently commented that not only is the Energy side of the business growing, he believes it will eventually be as big as their vehicle sales.
“Tesla Energy will be up to roughly the same size as automotive,”Musk told investors on the company’s recent earnings call.
The other aspect which cannot be ignored here is the level of enthusiasm there is for anything Elon Musk related and for good reason. Time and time again he has disrupted every single industry he has entered, much to the dismay of his retractors. Starting with banking and online payments (can we even imagine a world without Paypal?) to electric vehicles, solar energy, space exploration and very soon artificial intelligence. It is no wonder he is hailed as the real life Tony Stark with an almost cult like following from many entrepreneurs and tech enthusiasts alike. I know because I count myself amongst them.
And right there lies the problem. Much of the rally in Tesla’s stock price is based on emotions and hype, hype that Elon (and Tasla by extension) can do no wrong, leading inexperienced traders to jump in to what is a near vertical and unsustainable rally.
The rise in Retail Traders
Spurred by global pandemic, markets have been inundated with first time traders who, furloughed and stuck at home during the lockdown turned to trading as a way to earn extra money (and who knows maybe quit their jobs all together). UK based trading platform, Trading 212 announced on Monday that they have surpassed the £1 billion mark in client assets for the first time and much of it is a direct result of first time traders trying their luck at playing the markets.
The first billion is the hardest. Thank you for joining the first and only completely free investing service in the UK and Europe! ?? pic.twitter.com/06onbUPsPa— Trading 212 (@Trading212) August 17, 2020
This is important because tech stocks have been the go to for many of these new traders. Names like Apple, Tesla, Google and Amazon are recognised brands and it doesn’t take a market analyst to figure out that these companies stand to gain huge profits in spite of the lockdown brought on by the covid-19 pandemic, making them safe bets in in the eyes of many new traders.
The other side of this is that these new traders tend to put small amounts in with many trading platforms giving their users the ability to invest as little as $1/£1. For a company like Tesla, this means many new traders are holding only fractional shares and the incoming stock split applies only to those lucky enough to hold full shares, pushing many to invest more money and secure full shares before the 21st August deadline.
When the stock in question is trading at close to $1900, this is not a small investment by any stretch for many people. Compounded by the idea that Tesla can do no wrong and the future will be rosy whatever the outcome is blinding many to the fact that a price adjustment in the short term is almost certain and a stock split is the ideal time for it to happen.
This means if you are putting money into Tesla now, you should expect your portfolio to go into negative sooner rather than later.
A Perfect Opportunity to Short
Professional traders know that the market is unforgiving, buying and holding stock on emotion alone is likely to prove costly. More so when the stock in question is being pushed up on the hype of it’s incoming stock split, a move that doesn’t add any real value to a company’s market cap but the psychology of owning more stock has proven time and time again to create short term demand and in Tesla’s case this is leading to some truly astronomical highs.
The idea that “Tesla can do no wrong” may exacerbate the incoming price adjustment even further as even new traders are likely to take that view that shorting one or two new stocks post split will let them partially cash out whilst still keeping a large chunk of their portfolio. Tesla stock has gone from the mid $300 to $1900 in less than 6 months after all, and many will wonder why it cannot do so again. This combined with professional traders and institutions eyeing up Tesla’s all time high as the perfect opportunity to short is likely to lead to an all time low post split.
For those who jumped in on the Tesla stock since the 5 for 1 announcement, it would be wise to pay close attention to the coming days and be ready to sell, the short is coming and timing it right could make the difference between taking a profit or being stuck in negative territory for some time.
What do you think about Tesla’s stock price? Will it keep climbing or are you expecting a sharp fall? Let us know in the comments below.