How Much Will Tesla Inflate?

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Tesla stock soared past $1,500 a share today, and talk about whether it’s in a bubble has been reignited. Several analysts have weighed in on the EV maker today, and even some bears are starting to say that the shares could keep rising.

However, one author suggests that Tesla stock is indeed in a bubble — and that it’s bound to pop at some point.

In an opinion piece for MarketWatch, Mark Hulbert said Tesla stock is inflating like a bubble, and those who buy now should prepare for a crash. He noted that he made the same forecast in early February, and the shares plunged 60% in the six weeks following that prediction — alongside the rest of the market.

Of course, his February prediction didn’t include the coronavirus selloff that drove a plunge in pretty much every stock price, but it did end up coming true. He doesn’t expect his latest prediction about Tesla stock popping like a bubble to happen as quickly as his February prediction came true, but he does expect it to happen at some point.

Hulbert’s forecast of Tesla stock popping like a bubble is based on the sheer magnitude of the price increase in recent months. It’s also based on a model built by three Harvard researchers, which indicates that the odds of a crash increase along with recent gains in a stock’s price. Essentially, the higher the shares go, the harder they fall.

Odds of a crash

The model uses two-year market-adjusted returns. It suggests that a 50% increase in a stock price over the previous two years puts the probability of at least a 40% decline in the next two years at 20%. If the stock price increases 75%, the odds of a crash rise to 36%.

If a stock rises 100%, the odds of a crash increase to 53%, while a 125% runup in a stock price results in 76% odds of a crash. A 150% increase in a stock price puts the odds of a crash at 80%.

At the time of his February prediction, the odds of a crash in Tesla stock were nearing 80%. Hulbert said the odds of a crash are even higher now than they were then. The EV maker’s two-year return is 324 percentage points higher than the gain in the S&P 500.

Hulbert notes one key weakness with using the researchers’ model for a single stock. It’s based on industries instead of individual stocks, so he also looked at another study that examined the risks of a crash in individual stocks.

The unpublished study came from professors at Columbia Business School, Germany’s University of Kiel, and University of Amsterdam. They studied stocks which have a lower amount of selling pressure that usually keeps prices in check. These stocks are unconstrained, meaning they can sometimes skyrocket without regard to fundamentals, just like Tesla stock has.

The researchers found that after massive gains in unconstrained stocks, they on average lagged the market by 53% over the five years following their runups. That would qualify as a crash. They focused on stocks with very few short sellers, which is not the case with Tesla, although there are signs that some short sellers may have been scared away. In July 2019, open short interest was more than 40 million shares, but short interest now stands at about 15 million shares.

What analysts say about Tesla’s stock bubble

JMP Securities analyst Joe Osha is the new biggest bull on Wall Street when it comes to Tesla stock. He raised his price target to $1,500, which means he expects it to increase at least 24% more this year. He boosted his price target after the automaker reported that it had delivered 90,650 vehicles during the second quarter, compared to the consensus of about 83,000 vehicles.

Osha said if Tesla deliver 90,000 vehicles during an extremely difficult quarter, he believes the company can be shipping 130,000 to 140,000 vehicles per quarter by the end of the year. That would put Tesla on track to ship 757,000 vehicles next year. He also expects Tesla to hit $100 billion in revenue in 2025 and deliver 2.5 million vehicles with an EBITDA margin of 20% that year.

Morgan Stanley analyst Adam Jonas raised his price target for Tesla stock to $740, although he also raised his bull case for the shares to $2,070. FactSet data reveals that the average price target on Tesla stock is $778, and few analysts have targets above $1,000.

Wedbush analyst Daniel Ives set his bull case target at $2,000 and his base case price target at $1,250.