Tesla stock's hot month: Here's a reality check
Tesla Inc. shares in the past 30 days have climbed at a frenetic pace, but it’s becoming harder to argue the case for the bulls.
The last time there was a run like this, the rally was supported by revenues expanding at a double-digit clip. Things seem a lot gloomier now: The mood around electric cars is subdued, Tesla’s sales are shrinking and its profits sagging.
Tesla has soared 47% through Friday over its price one month ago — even after taking an 8% hit on Thursday when Bloomberg reported that Elon Musk’s hyped reveal of a Tesla robotaxi fleet was not happening on Aug. 8 as promised.
Investors say the surge is down to traders looking past Tesla’s EV credentials and betting that Elon Musk can transform it into an artificial intelligence powerhouse. The idea is that when Musk finally unveils Tesla’s keenly anticipated self-driving technology — the so-called robotaxi — it will solidify the company’s position as a leading AI player. But the reveal has now been delayed until at least October, some company insiders said, in keeping with a longstanding pattern of Tesla missing deadlines it sets for itself.
“Investors have been looking for that one breakthrough, real-world application of AI,” said Nicholas Colas, co-founder at DataTrek Research. “And now we have someone who has been working on AI for years saying, ‘Hey, I have got that killer application.’”
Yet, some numbers fly in the face of the current buzz around the stock: Earnings are set to drop by 21% in 2024, and revenue growth is seen decelerating to just 2.2%.
“This is clearly a faith-based stock now, not one whose valuations are in any way tied to current earnings power, and every day the stock rallies the bar for the event just gets higher,” Colas added.
The frenetic rally, which prompted bond billionaire Bill Gross last week to compare Tesla to meme stocks, picked up steam after the company’s July 2 sales update suggested the worst of the EV slowdown may be over. But the surge has since taken on a wilder momentum.
Tesla is now the fifth-most expensively priced stock in the S&P 500 Index on a price-to-earnings basis, far surpassing the rest of the megacap technology cohort. The shares were rising again on Thursday, which if held through the rest of the day, will mark 12-straight sessions of gains.
One risk is that the crowning success for Tesla in AI relies on it solving one of the most complex problems the technology has yet tackled — creating cars that drive themselves more safely than humans can. By and large, analysts and experts believe a real-world mass adoption of such technology is likely decades away.
Tesla has “always traded on hopes and dreams,” said Steve Sosnick, chief strategist at Interactive Brokers. “If you’re not thinking about the future, the fact that this company is worth almost as much as the rest of the auto industry combined doesn’t make sense. But if you think Elon Musk and Tesla are going to change the world, so what if you’re paying 100 times earnings?”
Even with its dizzyingly high PE ratio, the share price of about $250 is a long way from the peak of about $410 touched in November 2021. That’s because while Tesla’s stock is staging a spectacular turnaround, its earnings are getting smaller. In 2021, when the stock rose 50%, annual profit jumped nearly seven-fold.
None of this makes it any easier to predict whether the rally is about to break. However, trading in the options market suggest investors remain optimistic.
“Tesla options market positioning over the next three months has become extremely bullish,” said Vishal Vivek, an equity trading strategist at Citigroup. Options imply traders are positioning for a more than 9% move in either direction when the company reports second-quarter results on July 23, the strategist added.
Traders are bidding up the price of Tesla calls relative to puts, which shows added desire to chase the rally further, coupled with more muted demand for hedges in case the stock slumps.
Still, not everyone is feeling brave enough to pile on.
For David Wagner, portfolio manager at Aptus Capital Advisors, which holds the company’s shares, the uncertainty around what Musk may present on Aug. 8 makes the risk “too high right now to be investing new money into Tesla.”
The eye-watering wave of buying is also a cause of some unease for other market participants, concerned that the tide may turn.
“The biggest risk to Tesla shares is this level of volatility,” said Michael O’Rourke, chief market strategist at Jonestrading. “Usually, when you have this type of volatility, it works in both directions, so that’s a problem.”
