Admittedly, it’s difficult to write anything remotely negative about Tesla (NASDAQ:TSLA) at this point. Skeptics have swirled around Tesla stock pretty much since its initial public offering (IPO) back in 2010. But almost without exception, those skeptics have been wrong.
Simply put, TSLA has been one of the best stocks ever. The company went public in 2010, at a price of $17. Adjusted for last year’s stock split, that’s $3.40 per share. As I write this, TSLA trades at $890 — about 258 times that split-adjusted IPO price.
Much of the company’s gains have come in the last 21 months, after a stretch during which Tesla stock actually underperformed. The company first cleared $200 on a pre-split basis back in 2014, but wound up dipping below that level some five years later. Unquestionably, Tesla was a battleground stock — likely the most intense in the market, save for possibly Alibaba (NYSE:BABA) — but both bulls and bears managed to score a few wins.
That’s no longer the case. Bulls are roaring, with good reason. However, it’s certainly fair to wonder: at this point, just how much can possibly be left in this rally?
Anchoring Bias and the Rally in Tesla Stock
There’s a well-known psychological bias known as “anchoring,” or the human tendency to overweight the first piece of information you see.
In investing, anchoring bias often appears relative to the stock price. Many investors fall into the trap of believing that a stock that has moved has become by definition “too expensive” (if it’s gained) or “too cheap” (if it’s fallen).
That argument, however, is based on the idea that the former price was correct. It wasn’t. The stock market is constantly pricing in new information, with the decisions of millions of investors informing its movements. Because of that dynamism, newer prices are far more likely to be correct, or close to correct.
For Tesla stock, the rally from its June 2019 lows is based — to at least some degree — on new information. Competitors that were potential threats still haven’t dented the company’s growth. Meanwhile, the electric vehicle (EV) market seems to be poised for enormous growth.
Moreover, governments around the world have maintained some subsidies for electric vehicles whose end was a supposed threat to Tesla sales. Democratic control of the U.S. federal government suggests more subsidies could be on the way.
Meanwhile, consumers and businesses are, on their own, increasingly aware of their environmental footprints. So, it’s no surprise that EV stocks have soared. Investors are looking to the likes of Nio (NYSE:NIO), CIIG Merger (NASDAQ:CIIC) (which is set to merge with Arrival), or even Workhorse (NASDAQ:WKHS) as the “next Tesla.”
Of course, though, many investors simply have chosen to buy the original. In that context, it’s not surprising that TSLA has skyrocketed. And the rally on its own does not — and cannot — mean that the stock has gone “too far,” or that the gains need to reverse.
That said, the size of the rally has been truly breathtaking. Even considering the possibility of anchoring bias, the gains seem potentially unsustainable.
On Jun. 3, 2019, Tesla stock bottomed just below a split-adjusted $36. Since then — in 20 months — the stock has rallied over 2,300%. The market capitalization then was about $36 billion. It’s now over $844 billion (note that the share count has risen due to equity offerings).
Just in the past one year, TSLA has gained 688%. Over $700 billion in market value has been added. That’s equivalent to what Alibaba is worth at the moment. In fact, there are fewer than 10 companies in the world with market capitalizations greater than what TSLA has added in the last 12 months.
Will the Rally Reverse?
Those kinds of gains don’t seem healthy from a long-term perspective. Of course, there are reasons to be bullish, but it’s hard to find reasons to be that bullish, or to believe that such massive amounts of value have been created in such short time periods. But there is a possible explanation for the company’s exponential rally since March — a “gamma squeeze.”
The argument essentially is that Tesla stock has benefited from aggressive post-pandemic options buying that has been 1) heavy and 2) skewed toward bullish calls. That combination means market makers have to buy Tesla stock to hedge their exposure to upside moves. In turn, that creates what one market analyst calls a “perpetual motion machine” of higher share prices.
It’s far from certain that a “gamma squeeze” is the driving force behind this massive rally — or even a driving force at all. The inner mechanics of the market are seasoned even to experienced insiders.
However, it is a plausible explanation for a rally that simply has defied all fundamentals. Bear in mind that, not that long ago, even the most ardent TSLA bulls were arguing for a pre-split share price of $1,000. On that basis, TSLA now trades over $4,000.
Certainly, there’s a massive opportunity here, with a multi-trillion dollar global market in autos alone. But there’s also stiff competition and thin margins. And, of course, there’s a valuation that now has made Tesla one of the most valuable U.S.-listed companies.
The change in that valuation has been literally unprecedented. And it leads to the core question: were investors that wrong on Tesla stock 20 months ago? Or — as seems more likely — are they that wrong now?
On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.
After spending time at a retail brokerage, Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets.