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How some experts are explaining Tesla's insane stock rally: Morning Brief

Myles Udland
·Markets Reporter
·6 min read

Wednesday, February 5, 2020

Get the Morning Brief sent directly to your inbox every Monday to Friday by 6:30 a.m. ET. Subscribe

Morgan Stanley has a ‘Teracap super bull case’

Tesla (TSLA) shares continued their mind-bending rally on Tuesday.

After gaining almost 20% on Monday, the stock rallied another 13.73% on Tuesday to close at $887.06 per share. This rally includes a more than 8% decline during the final minutes of trading. At its high on Tuesday, Tesla shares traded hands at $968.

So far this year, the stock has more than doubled. And the parabolic move in shares of Tesla looks comical on a five-year chart.

Tesla shares have gone parabolic in the last few months, as made obvious by this chart showing the stock's performance over the last five years. (Source: Yahoo Finance)
Tesla shares have gone parabolic in the last few months, as made obvious by this chart showing the stock's performance over the last five years. (Source: Yahoo Finance)

This rally in Tesla has left investors, analysts, and anyone watching the stock market at a loss for cogent explanations.

To our mind, the Occam’s Razor take on why the stock has gone so far so fast is a short squeeze. Josh Brown wrote Tuesday that, “I think what’s happened with Tesla recently represents the greatest short squeeze of all time.”

And as we’ve chronicled in recent Morning Brief coverage of Tesla, the losses suffered by short-sellers during this rally have been severe. For years, Tesla has been a battleground stock and one of the most shorted names among companies with market caps over $10 billion.

Fundstrat’s Tom Lee told Yahoo Finance on Tuesday that he sees the rally in a somewhat different light, saying shorts getting squeezed out of positions are probably a factor but not the factor driving Tesla’s share price gains this year.

Lee notes that Tesla has been responsible for about 15% of the year-to-date gains in the Russell 1000 Growth index, which is used as the benchmark for many of Fundstrat’s institutional clients. Tesla, however, is not a widely-owned stock among many of these investors. And so in Lee’s view, performance chasing among investors benchmarked to an index seeing an outsized impact from every tick higher in Tesla is driving the stock. A classic FOMO trade, or investors having a fear of missing out.

So if Lee’s view is that Tesla’s rally is being driven largely by a technical or performance-based factor, some analysts are still looking for possible fundamental cases that might explain the move we’re witnessing in the stock.

In a note to clients published Tuesday, Morgan Stanley analyst Adam Jonas tried to make sense of the recent rally, outlining his 5 key thoughts for the stock at $780 (share price commentary that was, of course, immediately stale — Tesla opened at $865 on Tuesday).

One of Jonas’ areas of exploration was the “super bull case” for Tesla that creates a potential path towards the company becoming the most valuable auto company in the world. As of Tuesday’s close, Tesla’s market cap was just below $160 billion, not too far off the $200 billion market cap assigned to Toyota, currently the world’s most valuable carmaker.

But in the Jonas super bull world we’re looking past the world’s biggest car companies and thinking about what it might take to get Tesla into the realm of the Teracaps, the trillion dollar companies that have defined this market moment. And Tesla realizing that vision takes the company way beyond a car company, but instead a dominant supplier for EV batteries and a “standard seller for autonomy” in a self-driving future.

As the dominant supplier of EV batteries and powertrain technology for the market, Jonas sees a path towards Tesla earning $8 billion in annual profit, which valued at 10x implies $400 of value per Tesla share today. Similarly, Tesla earning $5/month on subscription revenues from its autonomous driving software could earn $5 billion in annual profit. Value these profits at 15x and Jonas sees another $400 of per-share value for Tesla.

These are, of course, lofty assumptions and Jonas sees this as a “blue sky” scenario for the stock that would take at least a decade to play out.

But when the value of any business rises this far, this fast, all that’s left to go on are the most aggressive, everything-goes-right assumptions.

And even these guesses might not get us close to explaining how Tesla went to bed last night worth more than Netflix (NFLX), Nike (NKE), and McDonald’s (MCD).

As they say — the truth is often stranger than fiction.

By Myles Udland, reporter and co-anchor of The Final Round. Follow him at @MylesUdland

What to watch today

Economy

  • 7 a.m. ET: MBA Mortgage Applications, week ended January 31 (+7.2% prior)

  • 8:15 a..m. ET: ADP employment change, January (160,000 expected, 202,000 prior)

  • 8:30 a.m. ET: Trade balance, December (-$47.8 billion expected, -$43.1 billion prior)

  • 9:45 a.m. ET: Markit US services PMI, January final (53.2 expected, 53.2 prior)

  • 9:45 a.m. ET: Markit US composite PMI, January final (53.1 prior)

  • 10 a.m. ET: ISM non-manufacturing index, January (55.1 expected, 54.9 prior)

Earnings

Pre-market

  • 8 a.m. ET: General Motors (GM) is expected to report an adjusted loss of less than one cent on $31.72 billion in revenue

  • Other notable reports: Humana (HUM), Merck & Co. (MRK)

Post-market

  • Peloton (PTON) is expected to report an adjusted loss of 33 cents per share on $423.65 million in revenue

Read more

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FILE - In this Wednesday, Nov. 13, 2019 file photo, a Disney logo forms part of a menu for the Disney Plus movie and entertainment streaming service on a computer screen in Walpole, Mass.   Analysts predict the entertainment giant's fiscal first-quarter earnings declined from a year earlier, even as revenue increased. Investors will be listening for an update on the company's video streaming service, which launched in November. Disney serves up its results Tuesday, Feb. 4, 2020.  (AP Photo/Steven Senne, File)
FILE - In this Wednesday, Nov. 13, 2019 file photo, a Disney logo forms part of a menu for the Disney Plus movie and entertainment streaming service on a computer screen in Walpole, Mass. Analysts predict the entertainment giant's fiscal first-quarter earnings declined from a year earlier, even as revenue increased. Investors will be listening for an update on the company's video streaming service, which launched in November. Disney serves up its results Tuesday, Feb. 4, 2020. (AP Photo/Steven Senne, File)

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