By Gunjan Banerji and Julia-Ambra Verlaine
When Tesla Inc. stock tumbled to a three-year low of around $178 a share last June, Brian White pounced. The online producer sold holdings in tech stalwarts like Microsoft Corp. and says he put about three-quarters of his retirement account into the electric-car maker's stock.
As Tesla's shares soared toward $500 in January, he tattooed the company's trademark T in a design on his arm.
"Nothing goes this right, this often," Mr. White said. "I assumed I was living in a simulation."
Few companies inspire investors to ink themselves with their insignia, but Tesla is no ordinary Wall Street trade. Shares have soared 22% in just the first few weeks of 2020 alone, catapulting the company's market capitalization to more than $90 billion in a rally that had made it the most valuable U.S. auto maker.
The leap has turbocharged a long-running war over the proper value of Tesla stock. This has split investors large and small into warring camps -- both sides digging in with quasi-religious fervor. Trading volumes have skyrocketed, with shares and options changing hands at a level not seen in at least five years.
Some Tesla investors are buying options that would pay out if the share price climbed to $700 or even $1,000. But others are betting against the stock in droves. Tesla is one of the market's biggest "shorts," in which investors sell borrowed shares in the hope of buying them back later at a lower price, according to IHS Markit data.
For many investors, Tesla marks a test case for the broader stock-market rally that has sent shares to records and driven the Dow Jones Industrial Average toward 30000 in recent sessions. Fears of recession have abated, eased by a series of interest-rate cuts by the Federal Reserve and a trade truce between the U.S. and China.
Worries remain, yet the turnaround has fueled investors' optimism and driven a handful of highflying technology stocks ahead of the market recently, though few have logged a run as dramatic as Tesla's.
The bulls are drawn to Tesla's prospects, comparing its innovations to Apple Inc. -- another technology company with a celebrated leader that rattled its industry with paradigm-shifting products from the Mac computer to the iPhone. In their view, Chief Executive Elon Musk is a visionary, leading a revolution in car design that is sure to leave traditional auto makers in the dust and maybe change electric products more broadly.
The doubters say Tesla's ballooning valuation makes little sense. The company has never posted an annual profit, carries more than a $10 billion debt load and hasn't manufactured cars at the scale of competitors.
Some investors are concerned about Mr. Musk's behavior. Regulators alleged that Mr. Musk misled investors when he tweeted in August 2018 that he had "funding secured" to take Tesla private at $420 a share. Mr. Musk agreed to step down as chairman and he and the company paid a combined $40 million in fines as part of a settlement with the Securities and Exchange Commission. He didn't admit or deny wrongdoing.
That hasn't slowed a wave of exuberance that has lifted shares since October when Tesla reported a surprise third-quarter profit.
Analysts at Jefferies International Ltd. said this month they expect Tesla shares to hit $600 -- a 50% bump from the prior $400 target -- while Oppenheimer & Co. analysts project the stock will hit $612. Tasha Keeney, an analyst at Ark Investment Management LLC, a big institutional investor in Tesla, said her firm has taken advantage of dips like the June stock swoon to buy even more shares. The firm recently held more than a $250 million stake in Tesla.
Ms. Keeney's best-case scenario has shares reaching $6,000 over the next five years, which would put it in the exclusive club of companies with a market value of more than $1 trillion. In her worst case, they hit $600 over the next five years: about an 18% jump from Friday's level.
"We faced a lot of criticism online for this position," Ms. Keeney said. "A group of Tesla bears online...They're just closing their eyes and putting their hands over their ears."
Online is where the long-running debate over Tesla's fair value has turned vitriolic. Impassioned investors frequently take to Twitter to argue their positions and launch broadsides -- lionizing Mr. Musk, predicting corporate bankruptcy and even complaining about car-service issues. Others exchange barbs on business-television news programs. Some bearish investors have even compared the stock to bitcoin, the volatile cryptocurrency that attracts die-hard devotees.
"The biggest reason the stock is up is because it's up," said John Hempton, founder of hedge fund Bronte Capital in Australia. He has a roughly $5 million position betting against the company, a small portion of his overall portfolio.
While Tesla fans have been elated with the stock gains, the advance has inflicted pain on investors who wagered that the shares would fall. Short sellers lost almost $3 billion on the trade in the first two weeks of the year, according to S3 Partners LLC.
Funds hurt by Tesla's unexpected third-quarter profit include David Einhorn's Greenlight Capital, which manages $1.9 billion, and the $4.7 billion Lakewood Capital Management, said people familiar with the firms. Those funds gained 13.8% and 25.8%, respectively, in 2019. A person familiar with Lakewood said Tesla was only a "marginal" loser for the year.
In an Oct. 30 letter to partners seen by The Wall Street Journal, Mr. Einhorn remained dubious about the stock, even though his short trade was a material loser during the third quarter, when Tesla shares recovered toward $240, up 34% from their low in June. He cited car battery fires, unsound corporate governance and a lawsuit filed by Walmart Inc. over what the retailer said were defective solar panels.
"As was the case with Musk's extraordinary 'funding secured' tweet last year, we believe this level of trampling of standard processes of corporate governance, ignoring methods to deal with related party transactions and self-dealing should lead to substantial consequences. For now, the accepted reality appears to be that Elon Musk is above the law," Mr. Einhorn wrote.
A spokesperson for Tesla didn't respond to a request for comment. Mr. Musk has taunted doubters on Twitter, promising the "short burn of the century" for investors betting against the stock. Such tweets have often been followed by a jump in share prices, hurting the short sellers in the process.
The rally also has upended bets against the company's bonds -- essentially wagers that Tesla would default on its debt. Once the stock went on a tear in the third quarter of 2019, many bond shorts threw in the towel, saying the company's soaring market value made a default unlikely.
Yet as the stock price has climbed, even some Tesla fans have started betting against it, saying overly enthusiastic investors have driven it too high. Tom Sosnoff, founder of tastytrade Inc., an online financial network, said he has a wager that would pay off if the stock fell, despite being a fan of Mr. Musk and his cars, one of which he owns.
"Obviously at this point I'm a glutton for punishment," Mr. Sosnoff said. He declined to reveal how much money he has lost on the trade, but said it amounted to "a couple of Teslas." Selling options on the company's shares has helped offset losses, he said.
In an unusual twist, the big bearish position in the market could help fuel the stock's meteoric rise. As the stock zipped to new highs, wrong-way bets by investors that Tesla would fall could force them to buy the shares instead, propelling the stock even higher.
"A large number of people with the same position is a very dangerous thing," said Mr. Hempton. "It is a cult around shorting the stock."
Despite Mr. Hempton's position, he says one factor working against the investment is its popularity. Savvy and unsophisticated investors alike have piled into the trade, with some taking on huge positions. As the stock rises, the short positions grow as a portion of their portfolios. This leads to losses, potentially requiring investors to buy Tesla stock to cover their positions, sending the shares even higher.
Still, he says he plans to hold on to the investment unless his outlook changes.
Bob Browne, chief investment officer for Northern Trust Asset Management, was considering shorting Tesla stock in his personal account. Predominantly a bond investor, he called two peers for their advice. After listening to their starkly divergent views, he decided to sit on the sidelines.
"Certain stocks are heavily traded by the best investors in the market," said Mr. Browne. "Investors are diametrically opposed when it comes to Tesla. You have to be careful before jumping into that gunfight."
--Juliet Chung and Charley Grant contributed to this article.
Write to Gunjan Banerji at Gunjan.Banerji@wsj.com and Julia-Ambra Verlaine at Julia.Verlaine@wsj.com