By Gunjan Banerji and Julia-Ambra Verlaine
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (January 21, 2020).
When Tesla Inc. stock tumbled to a three-year low of around $178
a share last June, Brian White pounced. The online producer sold
holdings in tech stalwarts like Microsoft Corp. and says he put
about three-quarters of his retirement account into the
electric-car maker's stock.
As Tesla's shares soared toward $500 in January, he tattooed the
company's trademark T in a design on his arm.
"Nothing goes this right, this often," Mr. White said. "I
assumed I was living in a simulation."
Few companies inspire investors to ink themselves with their
insignia, but Tesla is no ordinary Wall Street trade. Shares have
soared 22% in just the first few weeks of 2020 alone, catapulting
the company's market capitalization to more than $90 billion in a
rally that had made it the most valuable U.S. auto maker.
The leap has turbocharged a long-running war over the proper
value of Tesla stock. This has split investors large and small into
warring camps -- both sides digging in with quasi-religious fervor.
Trading volumes have skyrocketed, with shares and options changing
hands at a level not seen in at least five years.
Some Tesla investors are buying options that would pay out if
the share price climbed to $700 or even $1,000. But others are
betting against the stock in droves. Tesla is one of the market's
biggest "shorts," in which investors sell borrowed shares in the
hope of buying them back later at a lower price, according to IHS
Markit data.
For many investors, Tesla marks a test case for the broader
stock-market rally that has sent shares to records and driven the
Dow Jones Industrial Average toward 30000 in recent sessions. Fears
of recession have abated, eased by a series of interest-rate cuts
by the Federal Reserve and a trade truce between the U.S. and
China.
Worries remain, yet the turnaround has fueled investors'
optimism and driven a handful of highflying technology stocks ahead
of the market recently, though few have logged a run as dramatic as
Tesla's.
The bulls are drawn to Tesla's prospects, comparing its
innovations to Apple Inc. -- another technology company with a
celebrated leader that rattled its industry with paradigm-shifting
products from the Mac computer to the iPhone. In their view, Chief
Executive Elon Musk is a visionary, leading a revolution in car
design that is sure to leave traditional auto makers in the dust
and maybe change electric products more broadly.
The doubters say Tesla's ballooning valuation makes little
sense. The company has never posted an annual profit, carries more
than a $10 billion debt load and hasn't manufactured cars at the
scale of competitors.
Some investors are concerned about Mr. Musk's behavior.
Regulators alleged that Mr. Musk misled investors when he tweeted
in August 2018 that he had "funding secured" to take Tesla private
at $420 a share. Mr. Musk agreed to step down as chairman and he
and the company paid a combined $40 million in fines as part of a
settlement with the Securities and Exchange Commission. He didn't
admit or deny wrongdoing.
That hasn't slowed a wave of exuberance that has lifted shares
since October when Tesla reported a surprise third-quarter
profit.
Analysts at Jefferies International Ltd. said this month they
expect Tesla shares to hit $600 -- a 50% bump from the prior $400
target -- while Oppenheimer & Co. analysts project the stock
will hit $612. Tasha Keeney, an analyst at Ark Investment
Management LLC, a big institutional investor in Tesla, said her
firm has taken advantage of dips like the June stock swoon to buy
even more shares. The firm recently held more than a $250 million
stake in Tesla.
Ms. Keeney's best-case scenario has shares reaching $6,000 over
the next five years, which would put it in the exclusive club of
companies with a market value of more than $1 trillion. In her
worst case, they hit $600 over the next five years: about an 18%
jump from Friday's level.
"We faced a lot of criticism online for this position," Ms.
Keeney said. "A group of Tesla bears online...They're just closing
their eyes and putting their hands over their ears."
Online is where the long-running debate over Tesla's fair value
has turned vitriolic. Impassioned investors frequently take to
Twitter to argue their positions and launch broadsides -- lionizing
Mr. Musk, predicting corporate bankruptcy and even complaining
about car-service issues. Others exchange barbs on
business-television news programs. Some bearish investors have even
compared the stock to bitcoin, the volatile cryptocurrency that
attracts die-hard devotees.
"The biggest reason the stock is up is because it's up," said
John Hempton, founder of hedge fund Bronte Capital in Australia. He
has a roughly $5 million position betting against the company, a
small portion of his overall portfolio.
While Tesla fans have been elated with the stock gains, the
advance has inflicted pain on investors who wagered that the shares
would fall. Short sellers lost almost $3 billion on the trade in
the first two weeks of the year, according to S3 Partners LLC.
Funds hurt by Tesla's unexpected third-quarter profit include
David Einhorn's Greenlight Capital, which manages $1.9 billion, and
the $4.7 billion Lakewood Capital Management, said people familiar
with the firms. Those funds gained 13.8% and 25.8%, respectively,
in 2019. A person familiar with Lakewood said Tesla was only a
"marginal" loser for the year.
In an Oct. 30 letter to partners seen by The Wall Street
Journal, Mr. Einhorn remained dubious about the stock, even though
his short trade was a material loser during the third quarter, when
Tesla shares recovered toward $240, up 34% from their low in June.
He cited car battery fires, unsound corporate governance and a
lawsuit filed by Walmart Inc. over what the retailer said were
defective solar panels.
"As was the case with Musk's extraordinary 'funding secured'
tweet last year, we believe this level of trampling of standard
processes of corporate governance, ignoring methods to deal with
related party transactions and self-dealing should lead to
substantial consequences. For now, the accepted reality appears to
be that Elon Musk is above the law," Mr. Einhorn wrote.
A spokesperson for Tesla didn't respond to a request for
comment. Mr. Musk has taunted doubters on Twitter, promising the
"short burn of the century" for investors betting against the
stock. Such tweets have often been followed by a jump in share
prices, hurting the short sellers in the process.
The rally also has upended bets against the company's bonds --
essentially wagers that Tesla would default on its debt. Once the
stock went on a tear in the third quarter of 2019, many bond shorts
threw in the towel, saying the company's soaring market value made
a default unlikely.
Yet as the stock price has climbed, even some Tesla fans have
started betting against it, saying overly enthusiastic investors
have driven it too high. Tom Sosnoff, founder of tastytrade Inc.,
an online financial network, said he has a wager that would pay off
if the stock fell, despite being a fan of Mr. Musk and his cars,
one of which he owns.
"Obviously at this point I'm a glutton for punishment," Mr.
Sosnoff said. He declined to reveal how much money he has lost on
the trade, but said it amounted to "a couple of Teslas." Selling
options on the company's shares has helped offset losses, he
said.
In an unusual twist, the big bearish position in the market
could help fuel the stock's meteoric rise. As the stock zipped to
new highs, wrong-way bets by investors that Tesla would fall could
force them to buy the shares instead, propelling the stock even
higher.
"A large number of people with the same position is a very
dangerous thing," said Mr. Hempton. "It is a cult around shorting
the stock."
Despite Mr. Hempton's position, he says one factor working
against the investment is its popularity. Savvy and unsophisticated
investors alike have piled into the trade, with some taking on huge
positions. As the stock rises, the short positions grow as a
portion of their portfolios. This leads to losses, potentially
requiring investors to buy Tesla stock to cover their positions,
sending the shares even higher.
Still, he says he plans to hold on to the investment unless his
outlook changes.
Bob Browne, chief investment officer for Northern Trust Asset
Management, was considering shorting Tesla stock in his personal
account. Predominantly a bond investor, he called two peers for
their advice. After listening to their starkly divergent views, he
decided to sit on the sidelines.
"Certain stocks are heavily traded by the best investors in the
market," said Mr. Browne. "Investors are diametrically opposed when
it comes to Tesla. You have to be careful before jumping into that
gunfight."
--Juliet Chung and Charley Grant contributed to this
article.
Write to Gunjan Banerji at Gunjan.Banerji@wsj.com and
Julia-Ambra Verlaine at Julia.Verlaine@wsj.com
(END) Dow Jones Newswires
January 21, 2020 02:47 ET (07:47 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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