U.S. Markets closed

Tesla’s ‘Ludicrous Mode’ Fuels More Target Hikes, Burns Shorts

Esha Dey

(Bloomberg) -- 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% this year. That breakneck pace has prompted a rush by Wall Street analysts to raise targets and caused short investors’ losses to pile up.

The 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. By comparison, the S&P 500 Index has gained 1.6% 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 significantly raise their projections.

Jefferies’ Philippe Houchois bumped up his target to $600 from $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 $455 from $290 and maintained a hold rating, saying the company “truly seems to be currently firing on all cylinders” and 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 $2.8 billion in net-of-financing mark-to-market losses in 2020, including $1.25 billion in losses just on Monday’s 9.8% advance. This compares with losses of $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% of its free float, according to S3, down from 36.4% 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.”

To contact the reporter on this story: Esha Dey in New York at edey@bloomberg.net

To contact the editors responsible for this story: Brad Olesen at bolesen3@bloomberg.net, Will Daley

For more articles like this, please visit us at bloomberg.com

©2020 Bloomberg L.P.