The recent rally in TSLA stock is giving shorts a run for their money.
Shares of Tesla Inc (NASDAQ:TSLA) have been charging higher for the past couple of months, gaining more than 40% since the beginning of December. The stock has handsomely beaten the Nasdaq Composite (INDX:COMPX) which has returned around 7% in the same time period. In the months leading to December, Tesla stock was subject to a lot of speculation and skepticism. Tesla stock had crashed from its 52-week high of $265 in beginning of April to $181 by mid-November. The impending SolarCity merger, earnings and delivery misses, and Tesla's huge cash requirement were proving to be a big drag on Tesla stock. But with the SolarCity merger behind it, and the gigafacory ready for production, the stock is on a tear again. Tesla Inc stock is currently trading at $257.7, just inches away from it 52-week high and 7% above the consensus price target of $240. With the momentum in its favor, can Tesla stock continue its remarkable run?
Poster Child Of US Manufacturing
Ironically, one of the biggest catalysts for Tesla stock has been Elon Musk's nomination to President Donald Trump's business advisory board. According to Morgan Stanley analyst Adam Jonas, "Elon Musk has an important line of communication to Donald Trump," which is a big development for the company. Just after the election, one of the biggest fears for Tesla stockholders was that the Trump administration would roll back environmental regulations and encourage coal and oil production. However, a couple of weeks after the elections, the narrative completely changed with Tesla emerging as the poster boy of "US manufacturing", one of the main focuses of the current administration. Unlike its rivals such as Ford (NYSE:F) and General Motors (NYSE:GM) Tesla makes almost all of its cars and solar energy products inside the US. According to Bloomberg, the company is likely to be the biggest gainer if the border tax is imposed.
Tesla Inc Is Ramping Up Its Storage Business
Another catalyst for Tesla stock is its storage unit. With rising renewable energy production and demand-supply mismatches, the demand for storage units from power suppliers are likely to increase in next 2 to 5 years. Even before the integration of SolarCity, Tesla was ramping up its energy business through its Powerwall product. Powerwalls allowed consumers to store solar energy during the day and use it as a backup.
However, Tesla recently upped the game. The company is looking to provide backup to entire grids. According to the New York Times, Tesla has installed "396 refrigerator-size stacks of Tesla batteries" with a mission to provide backup power to around 15,000 homes in southern California. Tesla has won similar contracts from other governments. Morgan Stanley analyst Stephen Byrd sees the storage business as an "underappreciated disruptor" and expects the storage business to be an important growth driver.
"We believe Tesla is well positioned to capitalize on the growth of US energy storage demand and the Trump administration emphasis on US manufacturing presence (an advantage for Tesla given its Gigafactory in Nevada)."," For Tesla and LG, if the US storage market is ~145 GWh because regulators permit utility deployment in deregulated markets, and if Tesla and LG achieve higher market shares in the US and internationally, we estimate potential upside to Tesla stock of ~US$14 per share (~6% of current market cap)"
The Model 3 Upside
Tesla Inc recently hit a rare home run when it announced that its gigafactory has commenced the production of lithium ion batteries achieving an important milestone in the run up to the Model 3 launch. While many analysts were skeptical about Tesla starting Model 3 production in the current year, the company's decision to start lithium-ion batteries have generated some optimism. Morgan Stanley now expects Tesla to begin model 3 production from the later half of this year. Tesla got a rating upgrade from Morgan Stanley, which raised its price target for Tesla stock from $242 to $305. The price target was based on Morgan Stanley's increased expectation from Model 3. Morgan Stanley raised its overall 2018 unit sales forecast from 114,000 to 183,000 cars, which is still far below Tesla's own target of 500,000.
Tesla Stock Is Trading At Expensive Valuations
The recent rally in Tesla stock price has given shorts a run for their money. However, the stock still remains heavily shorted, with total shorted shares coming in at 35.04 million, up from 34.15 million from the previous reporting cycle. Short interest constitutes a massive 28% of Tesla's float. The bearish sentiment around the stock is not likely to go away anytime soon, as most of the problems still remain. The company still burns a huge amount of cash and continues to miss on its delivery targets. According to InsideEV, Tesla's January delivery numbers are not very encouraging. The recent rally has further stretched Tesla's valuation. Tesla stock is currently trading at a PS (ttm) ratio of 6.99 and an EV/EBITDA ratio of 366. In spite of the recent catalysts, the current valuation is quite expensive for Tesla stock, given the risks from competition and risks surrounding the "Model 3" launch. While the momentum is still in favor of Tesla stock, it remains a risky bet going into Q4 earnings.