Tesla (NASDAQ:TSLA) stock has been one of the year’s few success stories. In January and February, Tesla stock enjoyed an absolutely breathtaking short squeeze.
In the span of just a few weeks, the stock shot up from around $400 to as high as $968 per share. Tesla stock has given back most of its gains as part of the broader stock market plunge over the past month.
However, Tesla stock is still in the green year-to-date. That’s an incredible achievement given the carnage elsewhere in the overall market.
Should Tesla stock owners take advantage of the correction to load up on more stock? Or is this a good time to take profits while the stock is still in positive territory on the year? Unfortunately for Tesla shareholders, there’s a good chance that the stock will continue to lose altitude in the coming weeks.
Here’s why Tesla stock is sell here around $500 per share.
TSLA Stock Outperforms Thanks to the Short Sellers
Tesla stock had initially shrugged off the novel coronavirus. As recently as March 6, Tesla stock still traded above $700 per share, showing a 75% gain year-to-date. At that point, shares finally cracked, and Tesla quickly tumbled down to $400. But shares recovered and moved back to near $500. That’s an incredible price. Don’t forget that just one year ago, Tesla stock was trading way down at $275.
What has powered Tesla’s superior performance in the face of dismal market conditions? Technical factors play a big role. It’s no secret that Tesla has been one of the most heavily shorted stocks on American stock exchanges in recent years.
A large subset of the finance community can’t stand Elon Musk and takes glee in betting against his companies. Those bets went sour in January as Tesla blasted off as if it were a Space-X rocket.
Even now, Tesla stock is still enjoying significant buying interest thanks to short sellers. Remember that when short sellers bet against a company they create an obligation to purchase shares in the future. The short seller must later buy stock to close out their trade. In normal market conditions, that’s not a big deal.
In these trying times, however, many institutional short sellers are taking losses on other positions. As a result, they’re having to wind down chunks of their portfolios to reduce their risk. This, in turn, causes them to cover their bets against Tesla stock, which supports the share price.
The data shows this clearly. Last summer, short sellers were betting against more than 40 million shares of Tesla stock. This figure was still around 25 million shares at the start of 2020. Now, however, the short position is down to 16 million shares. This means that short sellers have bought up 24 million net shares of Tesla stock in recent months. At an average price of $500/share, that would be $12 billion that short sellers have pumped into TSLA stock to close out their bad bets.
Not Immune to the Coronavirus
While it’s great that Tesla stock has enjoyed heavy buying due to technical factors, that won’t do anything to improve the actual operating company’s results. And those, unfortunately, are looking troubled thanks to the virus.
Already, Tesla’s production had fallen short of expectations even before the coronavirus truly hit. Investors had hoped Tesla would achieve record production output in Q1 with the Shanghai plant now online. But Tesla wasn’t able to deliver that. And with the virus now affecting U.S. production, a big drop-off seems likely in future quarters. Over the weekend, news outlets reported that Tesla will be letting its contract workers go at its California and Nevada sites.
It’s unclear how long Tesla will have to idle much of its production capacity. In any case, it’s probably not a big loss given the concurrent plunge in sales activity.
Analysts are projecting a huge auto industry slowdown, with overall sales volumes expected to decline at least 20% for this year. With Tesla’s focus on higher-end vehicles, its sales could be especially hard hit. Also keep in mind that with gas prices sinking, electric vehicles now produce fewer cost savings as compared to internal combustion engine-powered cars.
TSLA Stock Verdict
Unfortunately for Tesla stock, the huge short-seller powered buying interest is drying up. More than half the short sellers have been forced out of the stock already. As that source of pent-up demand disappears, expect Tesla stock to trade more in line with the overall stock market. And, at least for now, that’s not great news for Tesla.
Meanwhile, with Tesla’s regular operations greatly limited, Elon Musk has turned to trying to manufacturing and distributing ventilators and other respiratory equipment to help fight the coronavirus.
On Twitter, Musk announced that the company has partnered with Medtronic (NYSE:MDT) in making medical equipment, and Tesla has posted schematics for ventilators. Obviously, it’s great that Musk is playing a role in helping during this crisis. However, Tesla shareholders may remember the unfortunate press Musk has received in other sometimes controversial efforts to assist in crisis situations.
Needless to say, the world will be a happier place when Musk can get back to making autos rather than medical equipment. Tesla having their car manufacturing greatly slowed down by the virus isn’t good news. And demand will be reduced for a few quarters until people feel more confident about big ticket purchases again. With Tesla stock still in the green year-to-date, this is a great time to lock in some profits.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. At the time of this writing, he held no positions in any of the aforementioned securities.
