The rally in Tesla Inc (NASDAQ:TSLA) continues seemingly unabated, with Tesla stock now up nearly 50 points (20%) since the March 21 low of $250.68. Things are definitely getting revved up in TSLA, probably way too much. And I believe the Tesla stock rally is about to run out of juice.
Certainly arguing about fundamentals in Tesla is a rather useless endeavor. With no earnings and a continuing appetite for burning cash, TSLA is the ultimate faith-based stock.
To put that faith in perspective, Tesla passed General Motors Company (NYSE:GM) as the largest U.S auto company Tuesday, with a market capitalization of $53 billion compared to $49.6 billion for GM. [Editor’s note: As of this writing, Tesla stock’s 1.2% dropoff puts GM back in the lead.] But revenues for 2016 were 23 times greater for General Motors than Tesla ($166 billion for GM versus just $7 billion for TSLA). That is definitely putting a lot of faith in future growth.
The driver behind the breakout in Tesla shares was the news that deliveries for the first quarter came in at 25,000 vehicles versus expectations of 24,200. So 800 more vehicles translates to a 26 point rally in the stock. Tesla hopes to deliver 500,000 cars in 2018. To put that in perspective, it means that with a market cap of roughly $50 billion, Tesla is being valued at $100,000 per car in 2018. Once again, a big leap of faith.
The faith in Tesla stock is also readily apparent in the price chart. After breaking out past the critical $291 level, TSLA is getting extremely overbought from a technical perspective. 9 day RSI is now well over 80 which has been a reliable short term bearish indicator.
Certainly a fair amount of the recent torrid rally in Tesla stock can be attributed to an epic short squeeze. Nearly 20% of the shares are shares outstanding are held short and given the 21% rally over just the past 10 trading days, we can probably assume a fair amount of these shorts were forced to cover.
In fact, Tesla CEO Elon Musk recently tweeted as much:
Stormy weather in Shortville …
— Elon Musk (@elonmusk) April 3, 2017
To me, this tweet is a great contrarian sign of a top in Tesla. Considering the past history of financial shenanigans in the SolarCity deal and the continued dilution of the stock through capital raises, an orchestrated short squeeze may have been in the offing for a while.
Now that the squeeze has gotten to an extreme, there may be little juice left to wring out of Tesla stock.
Tesla Stock Options
Buy the TSLA April $300 puts and sell the TSLA 13 April $295 puts for a $4 net debit. Ideally Tesla stock pulls back toward the $295 level by the April 13 expiration of the short put.
While an outright short of Tesla stock is a dangerous play, the options markets offers a defined-risk solution to fade the faith with a put diagonal spread.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at email@example.com.