Tesla's insane rally already rivals some of the biggest bubbles in recent history
New York(CNN Business) Tesla isn't just proving the haters wrong. Elon Musk's electric car maker appears to be defying the laws of physics.
Tesla (TSLA) has dazzled Wall Street by more than quadrupling its stock price since June. The meteoric rise, driven by Tesla's growing bottom line, Model 3 production in China and the unraveling of short bets, speaks to the company's enormous potential to transform the auto industry. At $130 billion, Tesla is now worth more than all other global auto makers not named Toyota (TM).
Even accounting for a sharp retreat earlier this week, Tesla shares have spiked more than 75% so far this year. At its record closing high of $887.06 on Tuesday, Tesla was up a mind-bending 2,519% since the end of 2012.
Wedbush analyst Dan Ives dubbed the Tesla rally a "parabolic run for the Wall Street history books" and said $1,000 is not out of the question.
Yet Tesla's stunning rally is also raising questions about how sustainable the run-up really is, prompting some to label it a bubble.
Michael Hartnett, Bank of America's chief investment strategist, listed Tesla's ridiculous rally as one example of "irrational exuberance" inspired by an unprecedented wave of easy money from central banks.
"Excess liquidity to combat deflation continues to fuel twin bubbles in scarce 'yield' & scarce 'growth' assets," Hartnett wrote in a note to clients Friday.
Bigger gains than biotech and homebuilder bubbles
Likewise, Bespoke Investment Group in a report this week called the Tesla move a "bubble-style" gain that is defying "all rhyme or reason."
Bespoke found that Tesla's blockbuster rally now rivals that experienced during several classic bubbles in the stock market since the 1990s.
For instance, it has taken Tesla fewer trading days to hit the 2,000% threshold than it did for the broad technology sector bubble that began in the mid-1990s. Likewise, Bespoke noted that Tesla's surge has surpassed the spectacular growth in homebuilder stocks during the early 2000s. And Tesla has easily exceeded the biotech boom that began in 2009.
One exception: the infamous rise of Yahoo and Cisco (CSCO) during the dotcom bubble. Bespoke found that those tech stocks hit the 2,000% mark much faster than Tesla.
All those previous manias ended in tears as cooler heads eventually prevailed. Investors eventually realized money-losing tech stocks were grossly overvalued (remember Pets.com?). Home builders collapsed after the housing crisis. Biotech stocks cooled off after the Federal Reserve and politicians called out excesses in that sector.
Tesla goes 'parabolic'
None of this means Tesla must suffer the same fate, although it's easy to see how it could stumble if it fails to live up to the enormous hype implied by the stock price.
"These sorts of explosive moves can always run a lot longer than anybody forecasts," Bespoke wrote. "But based on prior experience with parabolic moves like this, the stock will run out of steam and suffer a dramatic short-term fall at some point."
Tesla's bullish momentum, based on a technical measure known as the relative strength index, reached eye-popping levels earlier this week. Tesla's seven-day RSI spiked to 97 out of 100 on Tuesday, according to Peter Boockvar, chief investment officer at Bleakley Advisory Group.
"I don't believe I've ever seen any stock get this high in its RSI," Boockvar wrote in a note to clients, adding that even Qualcomm in 1999 only got to 90 during its own "parabolic" move.
Sure enough, the next day Tesla plummeted 17% after warning that deliveries from its new Shanghai plant would be delayed because of the coronavirus. The stock is down about 1% Friday.
What bankruptcy? Tesla is raking in profits
Despite the bubble claims, there are legitimate reasons for Tesla's share price to be on fire.
Last week, Tesla posted its first annual adjusted profit ever, providing further evidence of its mounting financial firepower. And Tesla predicted it will be consistently profitable going forward. The electric car maker's sturdier financials have silenced critics who warned it would run out of cash and file for bankruptcy.
The start of production at the plant in Shanghai has excited investors about the ability to ramp up sales in China, a crucial market.
"The China/Giga 3 growth story has gone from a pipe dream to a real fundamental driver for Musk & Co.," Wedbush's Ives wrote in a report earlier this week.
The enormous rally in Tesla, one of the most shorted stocks in the market, has caused serious pain to the company's many skeptics. As of February 3, Tesla short sellers had lost $8 billion on the stock this year alone, according to financial analytics firm S3 Partners.
When investors short a stock, they borrow shares from a broker and quickly sell them. The goal is to repurchase those shares when the stock is lower -- and pocket the difference.
Tesla's rapid rise has caused what's known as a "short squeeze," where bearish bets get quickly unwound to avoid even larger losses. That in turn propels the stock price higher. This phenomenon has played out in an extreme way with Tesla, exacerbating the stock rally, much to Musk's delight.
No one knows for sure if history will look back at this moment as a prime example of a massive bubble towards the end of the bull market, or a prime time to get into Tesla stock. Either way, Tesla shareholders could be in store for a roller coaster ride ahead.
"Taking either side of this trade at this point is a dangerous game," Bespoke wrote, "so we'd keep any trades small or simply enjoy watching the drama from the sidelines."
