How familiar are you with r/WallstreetBets? If you’re an investor, you should have at least a passing familiarity—it’s a great resource for what not to do. r/WallstreetBets is what happens when you combine an online casino with an investment platform, and they’ve proven themselves particularly enamored with the stock TSLA.
First, Some Background: WallstreetBets and Robinhood
Robinhood is an online trading platform made “for the people,” but if you’re a professional investor, you know exactly why the people aren’t generally allowed to manage their own portfolios. On Robinhood, investors have discovered infinite leverage devices that let them hold wildly large positions (such as literally millions) on very small capital (sometimes just a few thousand).
Of course, the capacity to lose big is just as large as the capacity to win big. Since they aren’t performing regular trades, they’re placing puts and calls, they can lose a tremendous amount of money. This has given rise to the subreddit WallstreetBets, which focuses on making high risk (and sometimes low reward) plays for the entertainment value of it.
So, Why Short TSLA?
The denizens of WallstreetBets (who call themselves “if 4chan found a Bloomberg terminal”) aren’t the only ones who want to short TSLA. Every since the cyber truck debacle, TSLA has become somewhat of a punchline itself. The idea that this stock, which soared at a nearly unheard of pace, could collapse into itself is extremely alluring for people who like shorting stocks.
But despite missteps and open foibles, TSLA’s stock has continued to rise… until recently.
Take a look at TSLA’s stock, and it looks like market manipulation. The stock has nearly doubled since the beginning of the year, though it took a sharp tank on February 4th. What’s going on?
Well, it’s a little dumb.
Shorting TSLA is Leading to Its Inflation
Let’s start from the beginning: There’s really nothing in TSLA’s fundamentals that would lead to its stock doubling over the past couple of months. It’s a cascade effect. TSLA is a solid stock that was probably valued correctly at the beginning of the year. It’s noted that it’s going to have good production in the coming year, but at this point, its stock price is borrowing from its future valuation.
But as the stock rose upon investor sentiment, many people decided to short the stock out of the idea that its precipitous rise was going to also lead to a fall. They were right, but their actions only made the stock more volatile.
So many people have been shorting TSLA stock that they’ve actually been leading to the stock inflating. This is a short squeeze; As investors purchased shorts, they actually had to purchase the stock as well, to cover their shorts.
Since TSLA did collapse on the 4th, some investors did make out with a lot of money. And that only makes the idea of the stock more alluring. At this point, TSLA’s stock price has absolutely nothing to do with the value of the company: It’s been turned into an investment strategy, essentially a game.
The Consequences of TSLA’s Meteoric Rise
Like many things in the investment community, people will eventually move on to the next big thing. But TSLA’s gotten an incredible boost, and it’s unlikely that all that valuation is going to be clawed back, especially if the company continues to perform at an adequate (if not astonishing) pace. Therefore, TSLA probably is going to be over-valued for some time, and it’s an investment that no one but the biggest risk-takers should be jumping on board right now.
The general advisor advice is that people should be selling their stock now, as it is currently valued at twice its actual value. But others who have been on board the TSLA train for a while may just want to continue to hold their stock, with the knowledge that TSLA itself hasn’t changed—the way that people interact with and purchase stocks has changed.
