Tesla joins S&P 500

Graphic representation of Tesla's stock index
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It may seem contradictory, since joining an important market index is a very good thing, requiring funds to adjust their holdings. In Tesla’s case, I see at least USD 8 billion would have to be invested through them. I tend to doubt this will automatically lead to a massive increase in valuation. Index funds may already have positions based on a variety of investment vehicles, such as options that can be turned into shares without any relevant influence on the price. Perhaps out of pure contrariness, the stock could turn sour when things are looking their best because analysts, investors and the media see only rising prices, completely ignoring the risks.

Then even Goldman Sachs’ latest move to raise the price target to USD 780 can’t rock my boat. But my point is wholly another. There have been a slew of companies that joined a major index only to see their stock fall, not rise – despite high expectations. It may well be that Tesla and its shareholder community’s prayers have been answered, but that’s not a guarantee shares will rise. Buy the rumor – sell the fact. Also, the amount of short interest, 45 million shares, is downright ludicrous, a mere 6.2 percent of the free float. And it’s even less when you calculate Tesla’s total stock, including CEO Elon Musk’s, coming to well over 1 billion shares, after the five-for-one split.

HOW

Fans had hoped Tesla’s entry into the index would trigger a short squeeze, pressing short sellers into covering their positions, causing a price surge. However, shares are already at an all-time high of around USD 650, bringing Tesla’s market cap to over USD 580 billion. Where will it end? Shouldn’t Tesla first deliver convincing financials, i.e., sustainable high profits?

Analysts at odds

While Goldman Sachs set a new USD 780 target price, analysts are arguing about where the stock will go after witnessing the 2020 hike from around USD 300 to USD 3,800 (non-adjusted for the stock split). With a share price in the neighborhood of USD 460, several people thought of as insiders started selling stock. Tesla’s chief financial officer gave up 1,250 of 19,000 shares, some directors sold between 1,000 and 5,000 – one even 155,000. You could argue these are negligible amounts, but the number of leading employees cashing in are not. As far as I know, there are no inside buyers. Meanwhile, J.P. Morgan analyst Ryan Brinkman raised his target price from USD 80 to USD 90, saying “Tesla’s valuation is difficult to conceive in any imagined scenario.”

With a profit of USD 0.76 instead of USD 0.60 a share, third-quarter non-GAAP results were better than predicted. The more conservative GAAP figures looked altogether different. Analysts forecast USD 0.50 earnings per share, but the actual EPS came to USD 0.27. Revenue was USD 8.8 billion, about USD 500 million higher than projected. Cash and cash equivalents improved to more than USD 14 billion due to a USD 5 billion capital raise. What may look like a healthy cushion is not all that fat considering investment plans of over USD 10 billion, plus the multi-billions in debts and obligations.

Net income was USD 331 million, thanks to USD 397 million in regulatory credit sales. In the last three quarters, the credits allowed Tesla to post revenues to the tune of USD 1.2 billion. Windfalls, you could say, that have little to do with business operations.

Some analysts see the stock rising further. Others, like Citibank and J.P. Morgan, are rather at USD 120 and USD 90. I hover in the middle at USD 250 to USD 350 when it comes to my expectations of 2021. Which is good for fuel cells and hydrogen, although Tesla and the analysts, too, are ignoring that. Let Tesla build the world’s largest battery factory in Grünheide, supported with EUR 3 billion to EUR 5 billion in government funds, including the European Union’s share, and let Elon Musk announce he could very well imagine working with an established automaker. I allow myself to be skeptical. Meanwhile, Tesla [Nasdaq: TSLA] seized the day once more, as an ATM program is expected to generate another USD 5 billion for the electric car manufacturer, the second USD 5 billion within just a few weeks. Wonderfully euphoric. But things could get grim when Tesla disappoints. I’ve been expecting that for some time.

Risk warning

Share trading can result in a total loss of your investment. Consider spreading the risk as a sensible precaution. The fuel cell companies mentioned in this article are small- and mid-cap businesses, which means their stocks may experience high volatility. The information in this article is based on publicly available sources, and the views and opinions expressed herein are those of the author only. They are not to be taken as a suggestion of what stocks to buy or sell and come without any explicit or implicit guarantee or warranty. The author focuses on mid-term and long-term prospects, not short-term gains, and may own shares in the company or the companies being analyzed.

Author: Sven Jösting, written December 18th, 2020

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