Can the Tesla share price keep on going? BofA thinks it can and here’s why

Will Tesla shares keep on rallying? Analyst at Bank of America think they can, pinning it on a virtuous cycle of higher stock prices enabling them to fund growth at lower costs, which in turn leads to higher share valuations.

In a note today BofA Global Research raised their price target on Tesla (TSLA) to $900, helping lift the stock by another 5% in early trade on Wall Street to $858, though it remains a little way below the $884 struck last week following Monday’s -8% move.

Last week Tesla management reported Q4 deliveries hit 180,750 units, which brought 2020 total deliveries to within a whisker of the 500k target set by Elon Musk, exceeding some rather conservative estimates by analysts. Tesla has also announced an equity distribution agreement to sell up to $5bn in common stock in future through an ‘at the market’ programme. Tesla did something similar in September and BofA think this all supports the notion that Tesla will use its high share price to raise fresh capital via low-cost equity offerings to fund growth.

In light of the offering, the bank raised its price target on Tesla to $900 from $500. To some extent, this is just another case of The Street playing catch up to the reality of the price action after a stunning rally in recent months. But it also underlines growing confidence that Tesla can manage to support these kinds of valuations.

But is this ‘upward stock spiral’ sustainable in the long run?

BofA notes that building capacity in the auto industry is expensive and often generates low returns on investment. And even if there is a software play for Tesla (and they have doubts about this), the analysts argue that the vehicles still need to be built and developed.

“It is important to recognise that the higher the upward spiral of TSLA’s stock goes, the cheaper capital becomes to fund growth, which is then rewarded by investors with a higher stock price. The inverse of this dynamic is also true, and it is this self-fulfilling framework that appears to explain the extreme moves in TSLA stock to the upside and downside,” they say.

Big Short

Meanwhile, The Big Short trader Michael Burry, who successfully bet against the US housing market before the 2007 collapse, is adding to his Tesla short position. “Well, my last Big Short got bigger and bigger and BIGGER too,” he said in a now-deleted Tweet. “Enjoy it while it lasts.”

Burry disclosed last month that he is shorting Tesla stock, saying it was trading at ‘ridiculous’ levels. Indeed, the company is now worth about $1.5m for every car it sold in 2020.