- Elon Musk’s cavalier attitude toward shareholders is evident in his behavior on Twitter.
- Tesla’s rally has been spurred on by a short squeeze.
- Any way you slice it, TSLA stock looks overvalued.
Tesla (NASDAQ:TSLA) CEO Elon Musk rivals Donald Trump as the most ridiculous Twitter user.
The eccentric CEO has a love-hate relationship with the Twittersphere, sometimes promising to leave for good only to return with a series of bizarre tweets. He hinted at another hiatus on Friday when he tweeted, “Twitter sucks” alongside a red rose that is said to symbolize The Democratic Socialists of America.
Musk went on to say “pronouns suck” a few hours later.
The pronouns tweet was too much for Grimes, Musk’s partner, and mother to his recent baby.
Earlier this year, Grimes’ mother publicly shamed Musk on Twitter as he fired off controversial tweets.
Musk’s Twitter Behavior is a Sell Sign for TSLA Stock
So, what does this have to do with TSLA stock? For investors backing Tesla far into the future, it sends a powerful message about Elon Musk’s inability to control his impulses.
Earlier this year, Musk commented that TSLA stock was overvalued and that he was going to sell off his possessions. That kind of public gamble with the firm’s stock underscores the fact that Musk doesn’t care at all about shareholders.
Musk’s bizarre Twitter persona isn’t the only reason to sell TSLA stock right now. In the wake of the firm’s second-quarter earnings beat and TSLA stock’s inclusion in the S&P 500, selling Tesla might seem counterintuitive.
A closer look at what exactly is driving TSLA’s rally paints a worrying picture for long-term investors.
Tesla’s Questionable Business Model
First, there’s Tesla’s underlying business model. Sure, sales and deliveries are on the rise, but debt has been financing that growth.
In a recent client note, Bank of America’s John Murphy pointed out that there’s no end in sight when it comes to Tesla’s debt accumulation:
[Tesla’s] pathway to becoming a self-funding entity is still dubious
He also noted that the firm’s rosy Q2 results aren’t telling the full story. “Creative accounting methods” have “masked the core results for the company.”
Murphy isn’t alone in questioning how reliable the firm’s financials are. Others point to Tesla’s use of regulatory credits sold in the future to create the illusion of profitability.
On top of that, Tesla stock’s most recent rally has been helped along by a massive short squeeze—meaning investors betting against TSLA caused the share price to rocket higher. Tesla has become the most shorted stock on the market, which has created a dangerous cycle.
Short-sellers ‘borrow’ TSLA shares from their broker with plans to sell them at a pre-arranged price. As the price of TSLA increases, short-sellers lose money. The amount they lose is unlimited in theory, but often they are forced to sell their shares when what they owe their broker equals the cash they hold in their account.
As TSLA stock rocketed higher, short-sellers were forced out of their positions. That wave of buying pushed the share price higher, thus driving more short sellers out, and so on.
Tesla is Overvalued in Every Sense of the Word
Tesla’s stock is now worth more than nearly the entire auto industry combined. Tesla’s market capitalization says the firm is worth roughly 99% of the industry. Meanwhile, Tesla produces less than 1% of the cars on the market. Even if you believe in Elon Musk’s brand, you have to admit that’s utterly insane.
Add the fact that the electric vehicle (EV) market is nearing a critical turning point, and the risky bubble that TSLA investors have inflated can be seen clearly.
Over the next five years, 200 new EV models will hit the market. Will demand be there? It looks unlikely.
Even before the pandemic hit, sales of electric cars were on a downtrend. In 2019 sales were up just 6% compared to 30% throughout the rest of the decade. Estimates see EVs making up only 7% of North America’s auto market.
That, plus the potentially damaging effects of the second wave of COVID-19 and a prolonged economic downturn, and you have a worrying future for the EV market.
Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com. The author holds no investment position in the above-mentioned securities.
Last modified: July 25, 2020 10:42 PM UTC