Sell TSLA, Short S&P 500

Tesla Inc.'s rapid stock price increase and its inclusion in the S&P 500 have driven it to a price at which it is now a compelling sell. 

For the perspectives of other investors, see:

Tesla's Inclusion in S&P 500 Makes Trading It and Other Stocks Tricky

How Will The Addition Of Tesla Affect The S&P 500's Fundamentals?

Tesla enters the S&P 500 with 1.69% weighting in the benchmark, fifth largest

Because of its substantial overvaluation, TSLA has room to fall more than 50%. Since it comprises approximately 1.7% of the S&P total market capitalization, a 50% decrease in TSLA alone would cause a 0.85% decrease in the value of the S&P 500. This is a statistically significant drag on the overall index. Worse, a TSLA decline could be correlated with declines in other components, or it could be source of contagion. Hence, it would be wise to decrease holdings of S&P 500 index equivalents or to hedge long positions.

What is the fundamental case? Let's suppose TSLA continues increasing production and market share. 

In the past 10 years, U.S. auto production varied from 7,743,093 to 12,198,137 vehicles, averaging 10,715,047 per year. If you assume that Tesla eventually captures 100% of the U.S. market at an average vehicle price of $40,000 and net margins of 10%, then it is worth perhaps $550 billion at its peak. Since its current market cap is about $660 billion, TSLA is already overvalued.

Actual Tesla current vehicle production is running at perhaps 600,000 to 700,000 vehicles annually. Even if you are optimistic and assume that Tesla can capture 40% of the U.S. market or 4.3 million vehicles per year, at 10% net margin, then TSLA is worth about $235 per share.

You can do similar analyses for worldwide market share, with results that also show that TSLA is overpriced relative to its very optimistic potential valuation five to fifteen years hence. Actual net margins will be lower, competitors will catch up, self-driving cars will change the market, and national interests will interfere with plans to sell into international markets. Tesla may encounter other manufacturing challenges. The current price of TSLA has gotten well ahead of its actual economic prospects. 

(The author has no long or short position in TSLA or derivatives based on TSLA.)