The gains of Tesla Stock $TSLA has been phenomenal this year with Tesla gaining nearly 800% in one year. Elon Musk is even richer than Warren Buffett. Is Tesla a bubble? Is it going to crash?
Why is Tesla Stock going up? There are several reasons for this. First of all, we can see that now Tesla is more correlated with the S&P 500 $SPX500 . That's because Tesla is now the 6th largest company on the Nasdaq $NSDQ100 . This means that several ETFs and index funds now own Tesla and the correlation with other big tech companies will be bigger. The whole market is going up with the Fed printing money.
But still Tesla has been outperforming the Nasdaq and that's because of several good news about the business with higher sales estimates and the possibility of Tesla having a fourth consecutive profitable quarter. This will mean that Tesla will be included on the S&P 500.
If Tesla is included on the S&P 500, more index funds and ETFs will buy shares of Tesla and this will send the stock price even higher. There are many investors who would want to buy Tesla shares before that inclusion so that they can profit from it.
But the main reason in my opinion why Tesla is going so high is because of the short sellers forced to cover their positions, in other words, a short squeeze is happening on Tesla stocks. Then, we have all the algorithmic trading which always amplify all these effects.
Some people, however, are only speculating on Tesla stocks. There is correlation between Google searches for Tesla stocks and the stock price. The last time I saw such a correlation was with Bitcoin $BTC and we know that Bitcoin was in a bubble in 2017 and it burst? Is Tesla in a bubble?
We cannot really compare Tesla with Bitcoin since Tesla is a stock with intrinsic value but we will need to know how to value Tesla and this is hard because the company is yet to be profitable. There seems to be a correlation with Tesla stock price and its EBITDA. Tesla has an EV/EBITDA of nearly 100, while the average car company has one of 10. Some people will argue that Tesla is more than just a car company, it is trying to be a utility company. Utility companies also have an average EV/EBITDA around 10. That doesn't mean that we need to add the multiples, we take the average, and Tesla should have an EV/EBITDA of 10.
We can make the argument that Tesla is the future and that it has better technologies than its peers and that's why the stock needs a premium. But the real question is whether Tesla will be valued at 100X EBITDA in the future? In one year or even 5 years? If this is the case, then Tesla is a good investment. But if the market decides to value Tesla with a lower multiple then the stock crashes even if the EBITDA keeps growing. This is exactly what happened to Microsoft $MSFT in 2000 during the dotcom bubble. It was being valued at 80X EPS until the market decided otherwise and it took 16 years to break even on that investment. The gains of Tesla are faster than that of Microsoft during the dotcom bubble.
It seems that Tesla can go even higher in the short-term but nobody can know for sure what will happen and the higher it goes, the more unstable it it. If you have investments in Tesla, depending on your financial situation and risk tolerance, you may consider taking profits. But if you're here for the long-term and it doesn't matter for you that the stock crashes 50%, then you can hold. But for those who have never invested in Tesla before and now wants exposure to Electric vehicles or renewables, I will suggest looking at mining companies. These stocks are much cheaper.
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