Chart of the week: the future for Tesla shares
After more than quadrupling since March, here’s what analyst John Burford thinks might happen next.
13th July 2020 10:52
by John Burford from interactive investor
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After more than quadrupling since March, here’s what analyst John Burford thinks might happen next.
Is Tesla today’s Radio Corporation of America?
Where do I start with today’s manic bids for stocks? I should say the mania exists at its most intense in the big-name US FAANGs high-tech (and also in major biotech names). But the poster child of Nasdaq’s near-vertical ascent must be electric vehicle company Tesla (NASDAQ:TSLA) with its ‘unconventional’ CEO, Elon Musk.
And please note that the US Nasdaq is the only major index that is making new all-time highs. Every other global major index is in a bear trend. That needs to be kept very firmly in mind.
One of the many measures highlighting the mania for share buying since 2009 must be the amazing performance of Tesla shares – from $25 eight years ago to the current highly bubblicious $1,540 today (and climbing). All the while, the company only made its first (minute) profit in Q1 of this year.
Oh, and although it sells a tiny fraction of the output of the automotive majors, its market cap is almost on a par with that of the top five of Ford (NYSE:F), General Motors (NYSE:GM), Fiat Chrysler (NYSE:FCAU), Honda (NYSE:HMC) and Toyota (NYSE:TM) combined. That is some achievement.
But, of course, it is the story that drives ‘investors’ to buy the shares, not the financials. We all know electric vehicles are likely to be part of the future – and Tesla is leading the way forward. The fossil-fuelled dinosaurs produced by the others are so last century, or so the story goes.
That story may well be true, but while technology may be favouring Tesla, the share price performance could tell a different story later on.
In fact, there is an historic precedence for the spectacular bursting of a tech bubble in the example of Radio Corporation of America (RCA). This company was the leader in the new radio technology and was leading research into television in the 1920s. Then, that company was the future and where massive profits seemed assured. It was the hot tech momentum stock of its day.
But then, in October 1929, as the shares were making new highs, the Wall Street Crash intervened, and this is the result:
Source: interactive investor. Past performance is not a guide to future performance.
Ouch! The company did go ahead and make lots of TVs and make big profits in the 1930s into the 1960s, but those buying the shares at the top experienced much pain that endured for years.
Here is Tesla’s amazing share chart:
Source: interactive investor. Past performance is not a guide to future performance.
Much of the fuel for the vertical rocket-like rally is the current massive short covering by hedge funds.
They had worked out that shares were highly over-valued, even at $500, as production targets were consistently missed. They built up one of the largest short interest positions on the board, but now they are throwing in the towel in a big way:
Source: zerohedge.com
Now, the short interest is back to levels seen last in 2011 when the share price was a minuscule $25. It is unlikely the shares will get to the moon in much the same way as Musk’s rockets will not. The question is: when will they hit today’s version of the Wall Street Crash – as they will?
To me, it appears prudent for investors to at least reduce their holdings in Tesla and heed the warning from RCA 90 years ago.
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John Burford is the author of the definitive text on his trading method, Tramline Trading. He is also a freelance contributor and not a direct employee of interactive investor.
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