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Why Tesla Stock Fell Sharply on Wednesday

By Daniel Sparks - Dec 2, 2020 at 12:27PM

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A famed investor just said he is shorting Tesla stock.

What happened

Shares of Tesla ( TSLA -2.38% ) were pummeled early Wednesday morning. The stock fell as much as 7.4% early. As of 11:45 a.m. EST, however, it's down only 3.1%.

The stock's big hit this morning was likely due to a tweet last night from noted investor Michael Burry. The former hedge fund manager, who is well known for predicting and profiting from the subprime mortgage crisis, said he is currently shorting Tesla stock.

A Model 3 Tesla on the road

Model 3. Image source: Tesla.

So what

"So, [Elon Musk], yes, I'm short $TSLA, but some free advice for a good guy... Seriously, issue 25-50% of your shares at the current ridiculous price," tweeted Burry. "That's not dilution. You'd be cementing permanence and untold optionality."

By shorting a stock, investors can make money when a stock declines. Of course, the opposite is true as well: The investor can lose money on their short position when a stock rises.

Following a near-800% run-up in Tesla's stock price over the past 12 months, the growth stock's valuation is becoming difficult to justify.

Now what

Tesla will need to execute with near-flawless precision going forward to justify its valuation. Specifically, the electric-car maker will likely need to keep growing its vehicle sales at rates of 30% to 50% annually, demonstrate even faster growth in its nascent green energy business, and make substantial progress toward autonomous driving. 

Despite Tesla stock's pricey valuation, investors may want to refrain from shorting the stock. Given the company's stellar execution recently, betting against the automaker seems like a risky bet. After all, investors could easily just avoid the stock entirely if they are not comfortable with the stock's valuation. In addition, shorting is generally considered very risky, and investors should be sure to fully understand the risks of shorting before they do so.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Tesla, Inc. Stock Quote
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