“It may have been a wild ride but a thumping 12% fall in trading on Thursday means that Tesla’s shares are now lower than they were a year ago,” says AJ Bell Investment Director Russ Mould. “That may be no big deal to long-term holders of, and true believers in, the stock, but it may well be a source of concern to those who bought at the peak of $1,230 in November, because they are sitting on a paper loss of a third of their money.
“That fall leaves Tesla in bear market territory. Again, that will not be a worry for long-term holders, paid-up members of the Tesla and Elon Musk fan club and those who are looking forward to electric vehicles and autonomous cars revolutionising travel and disrupting the car industry as we know it today.
“But even they might admit the share price chart looks a little shaky. A sequence of lower higher and lower lows will lead chart-watchers, or technical analysts, to start fretting about a breakdown in share price momentum. They will argue that Tesla needs to break the streak of lower lows, and quickly, if it is to arrest the share price fall.
Source: Refinitiv data
“Technical analysis does not appeal to everyone by any means and ultimately it is profits and cash flow which dictate the long-term valuation of a company and how its shares perform and are priced.
“But Tesla has work to do here too. Even after the near one-third fall the company has a market capitalisation of around $835 billion.
“That looks pretty steep for a firm which in 2021 generated $54 billion in sales and $5.5 billion in net profit, even if analysts expect those numbers to keep motoring higher in 2022, 2023 and beyond.
Source: Company accounts, Zack's, NASDAQ, Marketscreener, consensus analysts' forecasts
“Consensus forecasts have sales rising by more than 50% in 2022 and more than a quarter in 2023 to exceed $102 billion, with net income doubling to $10.7 billion and then rising by 30% to $13.9 billion in 2023.
Source: Company accounts, Zack's, NASDAQ, Marketscreener, consensus analysts' forecasts
“Yet even if those numbers prove accurate, Tesla trades on more than eight times sales and sixty times net profits for 2023. Both multiples represent huge premiums relative to the wider US market and leave little downside protection should anything untoward happen at Tesla specifically or to financial markets more generally.
“Bears may growl about Mr Musk’s unusual corporate governance and penchant for making dramatic announcements on Twitter; the debate over the merits of the Solar City acquisition; last year’s enforced recall of 475,000 cars because of potential rear-view camera issues; the decision to name the current range of cars S 3 X Y; and the chief executive’s sale of a 10% stake in the company for nearly $16 billion in late 2021 – a move which looks uncannily-timed right now.
“Yet even they will – grudgingly – admit that Tesla has made phenomenal progress to generate the sales and profits that it has and alter attituded toward electric vehicles.
“However, their arguments over valuation are harder to repel, as the recent share price slide suggests. This may be more to do with wider market issues as investors move away from expensive stocks that have performed well because they offer secular growth way out into the future and jam tomorrow, and move toward cheap stocks that have done badly because they offer a cyclical recovery as the economy turns up and jam today.
“Rising interest rates have also gone some to denting investor exuberance, as central banks threaten to take away some of the cheap liquidity in which financial markets have bathed for more than a decade.
“It may not be a coincidence that the amount of margin – borrowed money – used by investors to buy shares in the USA has started to retreat as the US Federal Reserve has begun to talk tough and that the America stock market’s hottest stocks have started to cool at the same time.”
Source: FINRA, Refinitiv data
