Tesla Motors Inc (NASDAQ:TSLA) might just be the hottest stock out there, and for good reason. Shares are up a staggering 117% in just the last two months.
But is it too late to get in? Have investors missed the boat? Anyone interested in buying shares at these levels must consider the following:
1) Tesla’s current share price is largely due to a short squeeze
Tesla shares likely wouldn’t be where they are today if the stock had not been so heavily shorted in the past. Before the recent explosion to the upside, roughly 45% of floating shares had been bet against.
Since mid April, short interest has plunged, dropping from about 30.6 million to less than 20 million shares. Granted, the short interest is still relatively high — about 25% — so the squeeze may continue for some time.
But the important thing to realize is that the buying that has taken Tesla Motors Inc (NASDAQ:TSLA) shares from about $50 to near $120 has been largely artificial. Rather than new investors coming in to take advantage of an attractive company, bearish investors have buying shares to limit their losses.
The problem for Tesla shareholders is that short squeezes often end in a sharp correction to the downside. Once all the bears have covered, there are no buyers left to keep the price elevated, and so shares plunge.
BlackBerry’s short squeeze comes to an end
A recent example of this phenomenon is Research In Motion Ltd (NASDAQ:BBRY). Shares appreciated about 170% from Sept. 2012 to Jan. 2013 ahead of the official unveiling of BlackBerry’s newest operating system, BB10.
Most of the buying that sent BlackBerry shares surging was likely done by shorts covering their positions, afraid of BB10’s potential to reinvent the Canadian handset maker. Research In Motion Ltd (NASDAQ:BBRY) short interest fell about 40% from Oct. 2012 to Jan. 2013.
But that short covering ended with a bang last week, when Research In Motion Ltd (NASDAQ:BBRY) shares lost about a third of their value after a disappointing earnings report. BB10 appears to be a failure, and shorts have little reason to fear losing their shirts.
A similar fate could befall Tesla Motors Inc (NASDAQ:TSLA). If the company runs into any problems at all — disappointing earnings, regulatory issues, whatever — the short squeeze could quickly reverse itself, and Tesla shares could plummet.
2) Mass market electric cars are still facing many barriers
While a post-short squeeze correction might be Tesla’s biggest problem in the short-term, the company still faces significant long-term challenges as well.
Tesla Motors Inc (NASDAQ:TSLA) has shown that it can successfully sell a high-end luxury car to the high-end market. But can it actually sell mass market vehicles? Significant barriers to mainstream electric adoption remain.
Primary barriers include price and range anxiety. If one excludes trucks (a major segment of the auto market that seems particularly ill-suited to electrification) all of May’s top selling vehicles started for under $30,000 — some, like the Honda Civic, start under $20,000.