US electric car maker Tesla (NASDAQ: TSLA) has been one of the success stories on the US market this year. The shares are now a staggering 250% higher than where they were at the beginning of 2020.
What’s behind this explosive rise and should UK investors consider taking a stake now?
Why is Tesla racing away?
There are a few reasons for its momentum. First, the buzz around electric vehicles looks to have moved into a higher gear. Increased concern for the environment and the firm’s technical supremacy over other manufacturers (it’s expected to unveil a million-mile, low-cost battery in September) has put Tesla in a thematic sweet spot. Factor-in investors’ belief in the visionary brilliance of CEO Elon Musk and Tesla’s rise, while extreme, makes some sense.
Another reason for this rise rests on its status as the ultimate ‘Marmite stock’. But those who loathe it question how a company that still only sells thousands of cars a year can be worth more than those that sell millions combined. This has previously led to massive ‘shorting’ of the stock — traders betting Tesla’s share price will fall.
One explanation for why this hasn’t happened is old-fashioned herd speculation. With no sports to bet on during lockdown and buoyed by Federal Reserve’s relief packages, bored novice investors have flooded markets in recent months. Many, it would seem, have put their money into Tesla. This has, in turn, forced said shorters to desperately close their positions (known as a ‘short squeeze’), further propelling the shares upwards.
Will it keep rising?
It’s hard to say if this can last. History is littered with companies continuing to rise in value despite becoming utterly detached from their fundamentals (which Tesla arguably is). Greed is a powerful motivator. So too is a great story.
What we do know is that Tesla ‘shorts’ are now at their lowest level on record. With fewer positions left to close, this could mean the big gains seen recently may be at an end. Adding to the bear case, market jitters over a second coronavirus wave could cause a heavy bout of profit-taking.
Last, let’s not forget that Musk’s unpredictability can be a liability for Tesla. In May, he suggested that the value of stock in his own company was “too high“, causing the shares to fall 10%.
Taking all this into account, I’d suggest anyone thinking of buying Tesla now should tread carefully if they don’t intend on holding for years. The long-term potential might be even better than anticipated, but the probability of near-term volatility up to the next earnings update on July 22 (and perhaps medium-term choppiness too) is very real.
Any alternatives?
One option for less risk-tolerant readers would be to look for a fund with shares in the company. UK-based, tech-focused, FTSE 100 member Scottish Mortgage Investment Trust is an example. Tesla is its biggest holding. Unsurprisingly, performance this year has been excellent. The fees charged are also reasonable for an actively-managed fund.
A passive alternative is the iShares Electric Vehicles and Driving Technology UCITS ETF. It has 3.31% of its assets in Tesla but is diversified across 84 other stocks. This should give holders sufficient protection while allowing them access to one of the decade’s biggest investment themes.
Buying either also avoids the paperwork required by brokers when you buy US stocks.
