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Jan 14, 2020

Tesla's 'Ludicrous Mode' fuels more target hikes, burns shorts

Tesla finds more fans as stock passes US$500

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Tesla Inc. appears to be riding on “Ludicrous Mode” — the feature of its electric cars that allows super-fast acceleration — with shares up more than 25 per cent this year. That breakneck pace has prompted a rush by Wall Street analysts to raise targets and caused short investors’ losses to pile up.

Shares have more than doubled since mid-October, helped by a surprise third-quarter profit, strong deliveries for the fourth quarter, the quick construction of its China plant and a general improvement in analysts’ sentiment. In comparison, the S&P 500 Index has gained 1.6 per cent so far this year.

The dizzying stock increase has left analysts playing catch up. After a string of price target boosts earlier this month, Jefferies and Deutsche Bank were the latest to raise their targets on Tesla significantly.

Jefferies’ Philippe Houchois bumped up his target to US$600 from US$400 on Tuesday, saying it would be wrong to exit Tesla on valuation since it is the only carmaker “engaged in a positive-sum game in electric vehicles amid rising market acceptance.” He expects Tesla’s auto business to turn profitable this year. Houchois maintained his buy rating on the stock.

Deutsche Bank increased its target to US$455 from US$290 and maintained a hold rating, saying the company “truly seems to be currently firing on all cylinders,” citing the recent start of China production, an emissions-pooling deal with Fiat Chrysler, the upcoming start of Model Y production and the building of a Europe factory.

“But with the stock hovering around all-time highs, we worry investor sentiment has gotten bullish too fast, ignoring some of the nearer-term execution risks,” Deutsche Bank said, noting that the China market is difficult to gauge in the near term due to a recent slump in new-energy vehicles.

Tesla’s fourth-quarter deliveries benefited from the expiration of electric car incentives in several markets, and therefore demand could moderate during the first quarter in some key geographies, Deutsche Bank said.

The sudden acceleration in Tesla shares is proving costly for one corner of the market — the short sellers who stand to make money when a stock goes down. According to financial analytics firm S3 Partners, bearish Tesla investors have racked up US$2.8 billion in net-of-financing mark-to-market losses in 2020, including US$1.25 billion in losses just on Monday’s 9.8-per-cent advance. This compares with losses of US$2.89 billion for all of 2019.

“With 2020 losses mounting, we should see a continuation and probably an acceleration of Tesla’s multi-month short squeeze,” S3’s Ihor Dusaniwsky wrote in a note.

Tesla’s short interest is now about 20 per cent of its free float, according to S3, down from 36.4 per cent in early June.

However, the surge is also making some brace for an eventual decline in the stock.

“There is a euphoric atmosphere around shares of Tesla which often results in sharp near-term declines,” said Gene Munster, managing partner of the venture capital firm Loup Ventures. Ultimately, the company’s valuation “needs to be grounded in consistent earnings, something that may be years away in the Tesla story.”