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Tesla (TSLA) stock soared past $1,400 a share today, and talk about whether it’s in a bubble has been reignited. Several analysts have weighed in on the EV maker today, and even some bears are starting to say that the shares could keep rising.
However, one author suggests that Tesla stock is indeed in a bubble — and that it's bound to pop at some point.
Tesla stock in a bubble
In an opinion piece for MarketWatch, Mark Hulbert said Tesla stock is inflating like a bubble, and those who buy now should prepare for a crash. He noted that he made the same forecast in early February, and the shares plunged 60% in the six weeks following that prediction — alongside the rest of the market.
Of course, his February prediction didn't include the coronavirus selloff that drove a plunge in pretty much every stock price, but it did end up coming true. He doesn't expect his latest prediction about Tesla stock popping like a bubble to happen as quickly as his February prediction came true, but he does expect it to happen at some point.
Hulbert's forecast of Tesla stock popping like a bubble is based on the sheer magnitude of the price increase in recent months. It's also based on a model built by three Harvard researchers, which indicates that the odds of a crash increase along with recent gains in a stock's price. Essentially, the higher the shares go, the harder they fall.
Odds of a crash
The model uses two-year market-adjusted returns. It suggests that a 50% increase in a stock price over the previous two years puts the probability of at least a 40% decline in the next two years at 20%. If the stock price increases 75%, the odds of a crash rise to 36%.
If a stock rises 100%, the odds of a crash increase to 53%, while a 125% runup in a stock price results in 76% odds of a crash. A 150% increase in a stock price puts the odds of a crash at 80%.
At the time of his February prediction, the odds of a crash in Tesla stock were nearing 80%. Hulbert said the odds of a crash are even higher now than they were then. The EV maker's two-year return is 324 percentage points higher than the gain in the S&P 500.
Hulbert notes one key weakness with using the researchers' model for a single stock. It's based on industries instead of individual stocks, so he also looked at another study that examined the risks of a crash in individual stocks.
The unpublished study came from professors at Columbia Business School, Germany's University of Kiel, and University of Amsterdam. They studied stocks which have a lower amount of selling pressure that usually keeps prices in check. These stocks are unconstrained, meaning they can sometimes skyrocket without regard to fundamentals, just like Tesla stock has.