Tesla’s Stock Went Up 36 Percent In 2 Days. What’s Going On?

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Written by Dana Sanchez
Tesla
Tesla’s stock price was compared to a new rocket ship from Elon Musk, gaining 36% in 2 days before falling almost 18% for its worst decline since 2012. Photo by Vlad Tchompalov on Unsplash

Tesla’s stock price was compared to a new rocket ship from Elon Musk, gaining 36 percent in two days before falling almost 18 percent on Wednesday for its worst percentage decline since 2012.

You can credit Tesla fans, who have almost boundless enthusiasm for the electric-car manufacturer and consider CEO Musk a hero, New York Times reported. “But the haters appear to be playing a role, too: After betting that the company would fail, many seem to be cutting their losses — and that is actually pushing shares higher.”

After recovering from a rocky start to 2019, Tesla is positioned for greatness — if you’re bullish. Auto sales were up 13 percent, deliveries rose 50 percent, and Tesla turned a corner in the second half of 2019 with its more affordable Model 3 car. 

The company has yet to post a profit but says it’s poised for global expansion with a new factory producing vehicles in China and another under construction in Europe. The valuation has more than tripled since late October and bulls believe it has cornered the growing electric vehicle battery market.

The haters are betting against Tesla’s shares because they say the company has struggled to generate enough cash from car sales to cover its costs and can’t meet deadlines. They also question Musk’s behavior, which invited scrutiny from regulators and resulted in him stepping down as Tesla chairman. And Tesla is overvalued, leaving the stock vulnerable. Safety is another concern.

Investors who bet against Tesla’s stock are now helping to drive it higher with short sales. Short selling is an investment or trading strategy that speculates on the decline in a stock. Here’s how NYT explains it: Investors borrowed Tesla shares from their brokers and sold them, hoping to buy back the shares and return them once Tesla’s stock price declined. A short-seller who borrowed a Tesla share, sold it at $300, and then bought it back at $200, would make a $100 gain.

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But if a stock rises steadily above the price at which the short-sellers initially sold it, short-sellers will usually rush to buy the shares to protect themselves against further losses. If enough investors do this, it pushes the stock price up even further, forcing even more buying by short-sellers.

Known as a short squeeze, this effect creates losses on existing short bets, but also deters new investors from betting against the stock. The almost vertical trajectory of Tesla’s share price suggests that a particularly acute short squeeze was in progress, according to NYT.  

The coronavirus outbreak in China is a problem for Tesla’s Shanghai factory and warrants a more pragmatic view on the stock, analysts led by Jed Dorsheimer said, according to Marketwatch.

During fourth-quarter reporting, Tesla warned investors that the epidemic will likely impact first-quarter profit as the Shanghai factory had been closed due government-mandated shutdowns.