The last time there was a run like this, the rally was supported by double-digit revenue growth, but things seem a lot gloomier now
Tesla has soared 44 per cent through Wednesday over an 11-day winning streak that’s the longest since June 2023. The stock now trades at 90 times forward earnings, a level last seen in early 2022, according to data compiled by Bloomberg.
“Investors have been looking for that one breakthrough, real-world application of AI,” Nicholas Colas, co-founder at DataTrek Research LLC, said. “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 per cent in 2024 and revenue growth is expected to decelerate to just 2.2 per cent.
“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 said.
The frenetic rally, which prompted bond billionaire Bill Gross this 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 expensive stock in the S&P 500 index on a price-to-earnings basis, far surpassing the rest of the megacap technology cohort.
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,” Steve Sosnick, chief strategist at Interactive Brokers Inc., said. “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 the dizzyingly high PE ratio, the share price of about US$263 is a long way from the peak of about US$410 that it 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 per cent, annual profit jumped nearly sevenfold.
None of this makes it any easier to predict whether the rally is about to break. However, trading in the options market suggests investors remain optimistic.
“Tesla options market positioning over the next three months has become extremely bullish,” Vishal Vivek, an equity trading strategist at Citigroup Inc., said.
Options imply traders are positioning for a more than nine per cent 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.
David Wagner, portfolio manager at Aptus Capital Advisors LLC, which holds the company’s shares, said 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,” Michael O’Rourke, chief market strategist at Jonestrading Institutional Services LLC, said. “Usually, when you have this type of volatility, it works in both directions, so that’s a problem.”
With assistance from Carly Wanna, Michael Msika and Thyagu Adinarayan.