Tesla stock has stalled out to start 2024, and short sellers are cashing in
Subscribers to Chart of the Week received this commentary on Sunday, February 11.
While it takes very little for Elon Musk’s Tesla Inc (NASDAQ:TSLA) to stay in headlines, this past week saw an interesting take from online business publisher Institutional Investor. In a Feb. 6 post titled, "Tesla Short Sellers Are in the Black This Year" author Michelle Celarier described the electric vehicle (EV) maker’s lackluster performance on the charts in the past 12+ months with the caveat that short sellers have experienced resounding success so far in 2024.
She cites one hedge fund manager saw a more than 5% net return in January, with over half coming from its TSLA short position. Another hedge fund sported a nearly 16% pop in the same time frame.
The victory lap taken by these short sellers requires some nuance and context. While many have viewed Tesla stock as this unassailable juggernaut, there have been signs of weakness –that are highlighted in the article -- wrought by Musk’s less-than-ideal damage to the company’s brand (and its subsequent worth). And while these current shorts can pat themselves on their back, for more perspective, the current number of short interest (80 million) is below its level at this time last year and 90% below its 2018 peak. In simpler terms, the number of shorts benefitting from this movement is lower than claimed.
A now former member of the omnipotent "Magnificent 7," which includes peers Apple (AAPL), Microsoft (MSFT), Alphabet (GOOGL), Amazon.com (AMZN), Nvidia (NVDA), and Meta Platforms (META), Tesla stock has shed 20% in the past six months alone, a large chunk coming from a 12.1% drawdown on Jan. 25 in the wake of the company’s disappointing fourth-quarter report. Amid the subsequent consolidation pattern, the formerly supportive 20-day moving average now looms above, leaving another layer of resistance on the table for Tesla stock traders.
It’s worth noting is that the security’s $600 billion market cap is roughly half of what it was at its peak in November 2021 -- $1.2 trillion. Per Schaeffer’s Senior Market Analyst Chris Prybal, TSLA’s Price to Revenue or price/sales (P/S) at that time peaked out at 26.0, so TSLA was valued at 26x Sales. With TSLA now at $600B, it’s now trading at a P/S ratio of 6.0. While this is a significant discount to peak valuation, it contrasts with other automakers. Peers of Tesla stock currently sport a P/S ratio of: Ferrari (RACE) 11.0, Rivian Automotive (RIVN) 4.0, Toyota Motor (TM) 1.0, Honda Motor (HMC) Stellantis (STLA) 0.40, Ford Motor (F) 0.30, and General Motors (GM) 0.25.
As shown in the chart below provided by Schaeffer’s Senior Quantitative Analyst Rocky White, there has been a "shifting of gears" taking place in the last five years among the auto sector. Tesla stock (dark blue line) saw an extreme correction following its late-2020 valuation peak, and is now sitting at P/S levels only touched briefly in 2022-2023 and the first half of 2020. The recent (and long-term) performance of short selling Tesla stock combined with our P/S evaluation, could indicating that should past be precedent, we could be looking down the barrel of a massive course correction for the EV stock’s valuation.
