More than 16 months after Tesla Inc (NASDAQ: TSLA) CEO Elon Musk's infamous tweet that Tesla had “funding secured” for a buyout at $420 per share, the stock reached $400 for the first time ever on Thursday, and Tesla bulls are hoping Musk's $420 target may soon be a reality.
What’s Driving The Rally
In the past six months, Tesla shares have rallied 77.8%, with much of the gains coming after the company reported an unexpectedly profitable third quarter. It was the first profitable quarter for Tesla since the third and fourth quarters of 2018.
Tesla management also confirmed in October it had begun Model 3 trial production at its China Gigafactory. Last week, Elektrek reported the Chinese Gigafactory is now producing a steady stream of Model 3s.
A big part of Tesla’s recent rally may also be technical in nature. This week, Boris Schlossberg, managing director of FX strategy at BK Asset Management, told CNBC Tesla is “either basically a scam that’s going to fall under its own financial obligations or it’s the Amazon of transportation.”
Critical Technical Level
Schlossberg said the $400 level could be a critical technical line in the sand.
“If it goes through $400, you could have a vertical move and all the shorts are going to get killed,” he said.
Short covering may also be a part of the recent rally.
S3 Partners analyst Ihor Dusaniwsky reported that Tesla short sellers took a $1.4 billion one-day hit following Tesla’s third-quarter earnings beat. At the time, Tesla’s short interest was $8.31 billion, second only to Apple, Inc. (NASDAQ: AAPL) among all U.S. equities.
Musk’s “funding secured” tweet drew a lot of criticism and ultimately resulted in a fraud settlement with the SEC for Musk. Tesla investors who bought the stock are finally back in the black more than a year after Musk made the $420 claim. Since that tweet, Tesla stock is up 5.1% overall, less than half the 11.8% gain of the overall S&P 500 in that time.
For Tesla to sustain its year-end rally into 2020, it must prove to investors that its third-quarter profitability is sustainable, unlike its previous quarters of profitability in the second half of 2018. It must also demonstrate its China Gigafactory can return the company to revenue growth after sales declined nearly 8% last quarter.
Tesla's stock traded around $404.21 per share at time of publication.
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