Is Tesla Stock In A Bubble?

Before the coronavirus pandemic hit, Tesla was Wall Street’s darling, but are the cracks beginning to show? Or will Elon Musk continue to defy expectations?

There are two types of investor: 

The first is like my colleague Niall, who will follow Elon Musk and Tesla (NASDAQ: TSLA) into hell and back, no matter what. This has paid off though, as Tesla is up more than 220% year on year, and almost 50% in the past month. Niall has done very well as a Tesla investor, no doubt. 

The second type of investor is like my other colleague and fellow writer, Mike. Mike is, shall we say, not the biggest fan of what he likes to call, ‘Meme Stocks’. Mike does not buy into the Tesla hype machine, and largely avoids companies with high social media sentiment such as Tesla, Virgin Galactic (NYSE: SPCE), Beyond Meat (NASDAQ: BYND), or Enphase Energy (NASDAQ: ENPH). Mike is a fan of Microsoft (NASDAQ: MSFT) and other such investments that many might call ‘solid’. 

Neither is right, nor wrong, this is just a matter of opinion, which is the bottom line when deciding on an investment. Both Niall and Mike are investing in what they believe in. 

There’s no denying that Tesla has grown incredibly in recent years. But there is cause for concern when a company should grow so big, so fast, despite the fact that it has never reported back-to-back profitable quarters. 

Is it possible that Tesla stock is in a bubble? 

The argument for a bubble

Tesla is not exactly a ‘stable’ stock. Its price went from close to $300 per share to nearly $1,000 between October 2019 and January 2020. Then the coronavirus hit, and it plummeted to as low as $360 per share in February, before rising once more, and at the time of writing, sitting at close to $800. The stock jumped more than 10% yesterday, 27 April, after rumor spread that it would reopen its Fremont manufacturing plant. Hours later, however, this was refuted and the factory will remain closed for the foreseeable future, due to health concerns surrounding the ongoing pandemic. 

That’s a dizzying amount of movement for a company valued at $147 billion. Sure, it’s no NIO (NYSE: NIO), Tesla’s Chinese counterpart which trades like a penny stock, but it’s pretty volatile nonetheless.

Between February and March, all the rage among analysts was ‘whether Tesla’s bubble had burst’, and there was a valid argument. Tesla’s stock was skyrocketing, and many argued that the history of parabolic moves like this indicated that the stock should run out of steam and suffer a dramatic short-term correction.

It seems like that is exactly what happened, as Tesla swiftly dropped, but now it is on its way back to all-time highs; should we be worried about what will happen next?

Can Tesla survive a recession? 

There is indeed some cause for concern in regards to a recession, which is inevitable after this COVID-19 downturn. Apart from the company’s $4 billion debt of which a large portion is due by 2023, it will also suffer loss of sales as people have less disposable income. 

We saw this in the last recession, where car sales plummeted, resulting in an unprecedented $85 billion government bailout to the likes of Ford (NYSE: F) and General Motors (NYSE: GM) just to keep them afloat. Can Tesla survive such a dip in sales, when long-established giants barely scraped by last time around? 

Not to mention the fact that Tesla is unlikely to hit any of its targets this year as the majority of its manufacturing is now closed. 

With less than 3% market share in the overall car market, electric vehicles are not yet a powerhouse, but Tesla does have the advantage of being the only ‘pure play’ in the market.

I am optimistic about Tesla

I am still optimistic about Tesla stock, despite the inevitability of a market downturn. As we have seen, there is still massive growth opportunity in the sector, and with oil supplies expected to be depleted by 2052, Tesla represents a strong alternative to gas vehicles now. 

Although Tesla’s revenues have only been growing steadily at 1% year over year, its sequential growth of 20%. In addition, it reported its first profitable year in 2019 since its 2010 IPO. And with the price of electric vehicle batteries falling 70% over the past decade, it is becoming cheaper to produce these vehicles. 

As well as that, it has a strong CEO-founder in Elon Musk who has proven that he is more than capable of weathering tough times. The upcoming Cybertruck remains on schedule for a 2021 release, while the Model Y is actually ahead of schedule. Should Tesla weather the oncoming recession, these new models should provide additional revenue and bolster its roster. As with every company, from titans like Apple (NASDAQ: AAPL) to small-cap minnows such as Shotspotter (NASDAQ: SSTI), Tesla’s earnings report will be dominated not by its Q1 performance, but by its guidance. 

Tesla’s Earnings Call

With its earnings call coming up on Wednesday, 29 April, Tesla is expecting to have delivered 88,000 vehicles in Q1, down from more than 112,000 in Q4 2019. As well as this, investors will be keen to get a look at the company’s balance sheet after it raised $2 billion in equity offerings in January. At least a third of this is expected to have been used in offsetting cash-burn caused by the pandemic.

MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above. Read our full disclosure policy here.