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Tesla Stock Has Doubled in 3 Months and Could Keep Rallying. Here’s Why.

Tesla’s stock rally is delighting the bulls, confounding the bears and amazing everyone else. Shares of the electric-vehicle pioneer cruised by the $500 Monday, gaining more than 9% to almost $525.

It seems there is no stopping the rally. Tesla (ticker: TSLA) stock is up more than 24% year to date and almost 110% over the past three months. Investors skeptical of Tesla’s stock-market valuation attribute the big gains to a short squeeze. That happens when bearish investors who had bet on a price decline by selling the stock short rush to cover their bets all at once, usually after good news, sending the stock higher.

That is one explanation for the recent run. But there is another. The stock market might be behaving rationally regarding Tesla stock. Actual profit, not the hope for profit, catalyzed Tesla’s recent run.

Things got rolling with better-than-expected third-quarter earnings. Tesla stock was about $250 a share before third-quarter numbers were released in late October. Now Wall Street is modeling higher profit for 2020. Since October, analysts have raised 2020 estimates from less than $4 a share to about $6.64 a share. That is a 66% rise in expected earnings.

The stock has risen even faster, so Tesla’s price-to-earnings multiple has expanded. Tesla trades for about 72 times estimated 2020 earnings, far higher than the 18 to 19 times average earnings multiple for stocks in the S&P 500. Shares of auto maker General Motors (GM) trade for less than 6 times estimated 2020 earnings.

Tesla will have to keep making money to maintain stock-price momentum. But at least there is a price-to-earnings ratio to measure. It wasn’t so long ago that the hope of profit trumped actual profit in the stock market.

Uber Technologies (UBER), for instance, had a peak market value of about $80 billion last summer. At that time, Tesla’s market capitalization was about $40 billion. Uber was a hot-IPO with plans to disrupt traditional car ownership. Profit, however, isn’t on the horizon for Uber. Wall Street expects the ride-hailing giant to lose about $2.35 a share in 2020.

Wall Street has soured on profitless companies since the summer, and Uber’s value has declined by almost 30%, while Tesla’s value has soared.

Tesla bears, as a result of the rally, are surely frustrated. Still, the stock remains heavily shorted. At more than 25 million shares, that is more than 18% of Tesla stock available for trading and about eight or nine times more short selling than occurs on average for stocks in the Dow Jones Industrial Average.

The stock was up 2% Tuesday morning to $535.60, while the Nasdaq Composite Index was down 0.3%.

Looking ahead, the big event for the company in 2020 will be the debut of the Model Y sport-utility vehicle. It is smaller than the Model X, which puts it in the sweet spot of vehicle size. Americans bought roughly eight million SUVs in 2019. The Toyota (TM) RAV-4, the Honda (HMC) CRV and the Nissan (NSANY) Rogue were the top-selling SUVs in the U.S.

The similar-size Model Y, however, qualifies as a luxury car and is expected to compete against BMW (BMW.Germany), which sold about 70,000 X3 compact SUVs in the U.S. last year.

The bulls eagerly await Model Y volumes. The bears continue to lick their wounds.

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