Is Tesla Worth $600 a Share?
After a great quarter for the company, Tesla (Nasdaq: TSLA) traded at more than $600 a share. The rally seems to have been driven that Tesla reported a profit of $2.14 a share. Analysts had expected the company to report earnings per share (EPS) of $1.72. [1]
News-driven rallies are common in stocks. Traders may seek to position portfolios to benefit from short-term price moves. In the case of Tesla, traders might be covering short positions.
A short position is a trade that turns the regular order of trading upside down. Normal trades, or the kind most often made by individual and institutional investors, are called long positions. The investor buys shares of a company expecting to benefit from an increase in price.
With a short position, the trader sells shares they don’t own to potentially benefit from a decline. They will need to borrow the shares from their broker to initiate the trade. Traders who are short pay a fee to their broker that is similar to interest on a loan when they borrow shares.
When a stock rallies like Tesla did, short positions show large losses.
Source: Optuma [2]
Is the Rally For Real?
Traders might be asking if the rally in the stock for real. Here, the answer is easy. The market price is always real. If you own shares of the stock bought at a lower price, you have a gain. If you have a short position, you have a loss.
The question to ask should be if the rally is justified. Based on fundamentals, it might not be. Tesla did report a great quarter. However, over the past twelve months the company reports a loss.
Source: Tesla [3]
Source: StreetInsider.com [4]
Finally, related to the question of sustainability of the rally, is the question of value. Here, earnings estimates can be useful.
Stock prices reflect future earnings. If earnings growth is high, the stock should trade at a high valuation.
Tesla is followed by a number of analysts. There are 27 published earnings estimates for next year, ranging from a low of $0.85 to a high of $14.40. On average, analysts EPS of about $5.90.
For the fiscal year ending in 2022, there are 18 published earnings estimates for next year, ranging from a low of $2.83 to a high of $33.93. On average, analysts EPS of about $12.58.
At the high end of expectations, Tesla is a buy. But at the average or the low end of the ranges, the stock is overvalued.
Being overvalued doesn’t mean the price will fall. It just means value investors face high risks and should consider other stocks.
Regards,
Editor, Peak Velocity Trader
Sources:
[1}: — Tesla 4Q earnings top expectations, company sees 500K+ deliveries in 2020 https://finance.yahoo.com/news/tesla-4q-2019-earnings-results-163001490.html [2] Optuma – optuma.com [3] Tesla Investor Relations — https://ir.tesla.com/static-files/b3cf7f5e-546a-4a65-9888-c928b914b529 [4] StreetInsider — https://www.streetinsider.com/ec_earnings.php?q=tsla
After spending nearly 20 years developing pattern recognition software for the United States Air Force, I retired from my military career in 2005. My plan was to utilize the same pattern recognition principals I used in the military and apply them to the largest and most lucrative market in the world: the stock market.
