Tesla shares soar 40% in 2 days as euphoria sets in and short sellers get squeezed

Tesla shares are soaring for the second day in a row after the electric car maker sold more cars than analysts thought it would, prompting investors to pour money into the stock at a record pace.

Tesla shares closed at $887US apiece on Tuesday, a level that means the company has more than doubled in value since the start of 2020.

Investor enthusiasm over the company's prospects began last week, when on Wednesday the company said itexpects to sell 500,000 vehicles this year, an increase of about 50 per cent from last year's level.

The company closed out January with its stock price at just over $650 a share. But exuberance kicked in this week as the stock has since gone up by 20 per cent on Monday and another 13 per cent on Tuesday. The buying appears to have been prompted in part by news in last week's earnings report that the company has now turned a profit for two quarters in a row.

Profitability is nice to see, but Barry Schwartz, chief investment officer at Baskin Wealth Management in Toronto, says there's nothing in Tesla's underlying numbers that can justify the current market price.

"I wish we owned the stock but we don't participate in manias," he said in an interview. "People are only buying this stock because it's going up in price there's no way to justify the valuation."

"It reminds me of the dot-com boom," he said.

At current prices, Tesla is worth roughly $150 billion. That's more than U.S. automakers GM, Chrysler and Ford are worth combined, even though that trio sells more cars in two weeksthan Tesla does in an entire year.

Tesla may well be a "great" company with "amazing" products that people want to buy, but that doesn't mean the stock isn't wildly overvalued before the current run, and even more so now.

"Hype and momentum have taken over," he said. "You're buying it with your eyes closed and your brain turned off."

Short squeeze

The shares may be being gobbled up by investors who are big believers in the company's prospects. But at least some of the buyers are people who, not too long ago, believed the company was overdue for a crash.

So-called short sellers are investors who make money by betting against companies they think are poised to go down in value, and almost 18per cent of Tesla shares right now are in the hands of short sellers more than any other U.S. company, according to research firm S3 Partners.

Watch this animation for a brief explainer of what short selling is and how it can sometimes lead to such a squeeze:

How short selling works

5 years ago

Duration 0:46

An animated explanation of how people make money from stocks losing value

When their bets go wrong and targeted companies increase in value, short sellers have to rush to cover their bets, which can cause those shares to quickly go up in value in a process known as a "short squeeze."

The shorts are buying up billions of dollars in Tesla shares at least in part because that's better than waiting longer and having to buy them for even more.

"Tesla shorts were down $2.89 billion in ... losses in 2019 and are down $8.31 billion in ... losses so far in 2020, including $2.47 billion on today's price move," S3 Partners analyst Ihor Dusaniwsky said in a research note.

Short sellers have targeted Tesla for years, and the company's controversial CEO Elon Musk is no fan of them, either. He's said in the past thatshort selling should be "illegal"and urged stock regulator the SEC to crack down on the practice.

On Monday, with the short squeeze already underway, he tweeted three fire emojis a veiled reference to his glee at his critics getting burned.

A short squeeze is definitely a factor in the company's meteoric journey this week, but the effect of that should be temporary.

A prolonged move higher requires more than just temporary reasons, and it's not difficult to find analysts who are convinced the company's rise is just the start of a long journey higher.

Last week's earnings show the companyhas now posted a small profit for two quarters in a row, which is causing some investors to think the hyped-up company is finally starting to live up to its promise.

"Investors are now starting to believe that Tesla can make mass-volume electric vehicles, and automakers, battery makers and suppliers can make money from electric vehicles," Samsung Securities analyst Cho Hyung-ryul said in a note to clients Tuesday.

Billionaire investor Ron Baron, whose firm holds a nearly 1 per cent stake in Tesla, says the company is on its way to $1 trillion in sales within the next decade. That would be about 50 timesthe roughly $20 billion in revenue it took in last year, a figure that would turn Tesla into "one of the largest companies in the whole world," he told financial news channel CNBC on Tuesday.

But Baskin's Schwartz is still unconvinced. "You can't come up with a valuation on Tesla right now that makes any sense," he said. "It's pricing in every single thing that may go well in the future without pricing in anything that could go wrong."