Tesla Inc (TSLA) Rally Supported By Short Sellers, Low Expectations

Tesla Inc (Nasdaq: TSLA) stock is having a good week, enjoying its best day in more that two years on Wednesday and gaining nearly 10 percent following the company's annual shareholder meeting. Despite the big move, analysts say it's likely market dynamics, not improved company fundamentals, that are driving the rally.

Morgan Stanley analyst Adam Jonas says the big gains on Wednesday were triggered by Tesla simply reiterating its previous Model 3 production guidance and 2018 cash flow targets. Tesla said it still expects to produce 5,000 Model 3s per week by the end of June and it still expects to be profitable and cash-flow positive by the third quarter, the same targets Tesla discussed roughly a month ago when it reported first-quarter earnings.

[See: A Look Into the Future for 7 Top Auto Stocks.]

"We think the stock move reflects more on [bearish] investor positioning than truly incremental data on fundamentals," Jonas says.

Jonas is skeptical of all of Tesla's targets. Morgan Stanley estimates Tesla will not produce Model 3s at a sustainable rate of 5,000 vehicles per week until the first half of 2019. In addition, the firm is projecting a net loss of $554 million from Tesla in the third quarter of 2018 and $1.4 billion in cash burn in the second half of the year. Jonas says Tesla will not be profitable until 2021 at the earliest.

Despite Tesla's repeated claims that it will not need to raise capital in 2018, Jonas says Tesla will likely conduct a $3 billion capital raise in the third quarter.

Given all the negativity surrounding Tesla in the market and the tremendous number of short sellers betting against the stock, Jonas says Tesla could see major additional near-term upside if the company can hit its 2018 targets.

"If Tesla were able to achieve 5,000 of weekly production of Model 3 and avoid a significantly dilutive or expensive capital raise, it could trigger a continued squeeze in the name," Jonas says.

[See: The 10 Most Valuable Auto Companies in the World.]

According to data from S3 Analytics, Tesla remains the most heavily shorted U.S. stock in the entire market, with an outstanding short position of roughly $11 billion. Tesla short sellers took a $1.1 billion loss on Wednesday alone. S3 Analytics estimates Tesla short sellers have now lost a total of more than $5.1 billion since the beginning of 2016.

Morgan Stanley has an "equal-weight" rating and $291 price target for TSLA stock.

Wayne Duggan is a freelance investment strategy reporter with a focus on energy and emerging market stocks. He has a degree in brain and cognitive sciences from the Massachusetts Institute of Technology and specializes in the psychological challenges of investing. He is a senior financial market reporter for Benzinga and has contributed financial market analysis to Motley Fool, Seeking Alpha and InvestorPlace. He is also the author of the book "Beating Wall Street With Common Sense," which focuses on the practical strategies he has used to outperform the stock market. You can follow him on Twitter @DugganSense, check out his latest content at tradingcommonsense.com or email him at wpd@tradingcommonsense.com.

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