Tesla earnings are tomorrow - steer clear or accelerate ahead?

We haven't been stuck for controversy in the last few months. The wearing of masks, state responses to re-opening economies and whether it is now acceptable behaviour to have an UberEats bill nearing $500 a month consisting mainly of Tacos. However, over on Wall Street, there is an equally controversial story dominating conversation: Tesla.

The market has fuelled the Tesla bulls this year as the stock is already up an incredible 300% this year. Despite this, there are still droves of investors betting against this rally continuing. In fact, there is no US stock in history that has ever been as hated as Tesla, with the value of all shorted Tesla shares close to $20 billion. To put this into perspective, Apple is the second most hated stock with $13billion of shares shorted - and Apple is 14 times bigger than Tesla. Tesla was shorted heavily long before this year though, and the rally has done very little to shift sentiment from those that view Tesla has significantly overvalued.

The divided opinion amongst investors is also echoed by those analysts covering the stock. Around 25% of analysts rate Tesla a buy - well below the average for a stock in the Dow Jones which is 55%. Those who rate Tesla as a sell make up 40% of analysts - significantly higher than the average 7% sell ratings for Dow constituents. As a result, price targets for Tesla, whose stock currently sits at $1643, range from $300 to $2,300. This range is more than 100% of the current stock price and more than three times the average bull-bear spread for stocks in the Dow.

So it is clear that some analysts see Tesla having further fuel for the road ahead whilst others see it having a run similar to those that were on the wrong end of the dot com bubble. When Deutsche bank recently asked their investor clients for their views, more than 90% said they felt Tesla is overvalued. Given it trades for 80 times 2022 earnings after rallying over 300% this year, that seems more than fair.

As to whether Tesla can continue powering upwards following earnings tomorrow after the close, the bulls will be pointing to the power of momentum, the likely addition to the S&P 500 as well as hopes of strong Chinese growth and stronger-than-expected June deliveries as reasons to stay with the stock going into earnings. But if Tesla disappoints, the reversal could get quite ugly.

After such immense returns it can be hard for investors to know whether to stick or twist. With earnings being released tomorrow, the valuation is such that there is an argument to trim positions that have become heavily inflated as the rally has accelerated. It is set to be one of the most closely-watched earnings reports this season, and one in which investors will have much greater clarity on whether Tesla still has enough left in the tank to continue speeding along the highway.