Tesla after the split – will the bubble continue to grow?

September 03, 2020 12:30

On Monday, some traders woke up, looked at their trading charts and shook their heads in disbelief – Tesla's stock showed a drop of more than 80% over the weekend.

Did the bubble finally burst? No, it didn't, the drop in the price was due to a stock split of 5 to 1, but, still, many inexperienced traders didn't really know what was happening, some posting with panic on Social Media platforms like Twitter. This brought on some fears amid the recent explosion on the upside, which brought Tesla's market capitalization to over 400 billion USD.

After stock split announcement: #TSLA with clear signs of a bubble -

On the 11th of August, Tesla announced a stock split of 5 to 1. Since then, the stock has gained nearly 75%, even though the overall fundamental outlook for the company hasn't changed a bit.

While some market participants and financial market commentators argued that the recent explosion in the stock price was due to the fact that the split will allow more small investors to buy Tesla stock, we'd like to say: that doesn't make any sense at all.

With a stock split, here's what happens:

  • the number of shares increases by a factor of five, but;
  • the underlying company and its fundamentals do not change a bit, which means;
  • the stock price drops by 80% while the number of outstanding stocks increases by a factor of 5

While this may be self-explanatory to experienced traders, it needs to be explained to the new generation of private investors buying Tesla stock, sometimes with leverage exposure. Driving stock prices higher is a dangerous sign.

In our opinion, it shows that the hands holding Tesla stock may be extraordinarily weak, which could sooner or later result in a very sharp drop.

Our scepticism arises out of the fact that with a market capitalization of over 400 billion USD, the PE ratio of Tesla is now over 1,000 times earnings.

Regarding short engagements, there are also a few key things to consider:

  • Short sellers are betting against Tesla, having lost more than 25 billion USD combined in 2020 so far
  • Markets have the ability to stay irrational for far longer than a trader can stay solvent

As such, we are cautious of anti-cyclical short engagements. Yet, still we can clearly see signs of a massive bubble here and we also see the risk-reward ratio for long engagements as becoming more and more unattractive.

How to trade #TSLA in this environment?

In general, the picture for #TSLA remains bullish as long as we trade above 270 USD on a daily time frame.

Still, a short-term bounce may be imminent, especially if "seasonality hits": during a US election year, performance in Equities hasn't been positive in September and October, meaning that a drop in Equities could especially result in a sharer correction in highly valued growth stocks like Tesla.

The first target of a correction could be found around 330 to 350 USD, making anti-cyclical short engagement somehow interesting from a risk-reward perspective.

Source: Admiral Markets MT5 with MT5SE Add-on #NVDA chart (between April 04, 2019, to September 02, 2020). Accessed: September 02, 2020, at 7:50 PM GMT - Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2015, the value of #TSLA increased by 7.7%. In 2016, it decreased by 7.4%. In 2017, it increased by 44.9%. In 2018, it increased by 6.7% and in 2019, it increased by 36.7%, meaning that in five years, it was up by 87.7%.

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