(Bloomberg) — Tesla Inc.TSLA) Stocks are rising at a ferocious pace, but it’s becoming harder to back up the bulls’ case.
The last time there was such a surge, the stock rose on double-digit revenue growth, but things are much bleaker now: The mood around electric cars has calmed, Tesla’s sales are falling, and its profits are tumbling.
Tesla shares had risen 44% through Wednesday, its longest streak of 11 consecutive days of gains since June 2023. The company’s shares are now trading at 90 times forward earnings, the highest level since early 2022, according to data compiled by Bloomberg.
Investors say the surge is due to traders ignoring Tesla’s track record with electric vehicles and instead betting that Elon Musk can turn the company into an artificial intelligence powerhouse. The bet is that when Musk finally unveils Tesla’s long-awaited self-driving technology, or so-called robotaxi, on Aug. 8, it will cement the company’s position as an AI leader.
“Investors have been looking for the breakthrough practical application of AI for a long time,” said Nicholas Colas, co-founder of DataTrek Research, “and now we have someone who’s been working on AI for years saying, ‘Hey, here’s the killer application for it.'”
But some of the numbers are at odds with the current buzz around the stock: Profits are expected to fall 21% in 2024, and sales growth is expected to slow to just 2.2%.
“This is clearly a faith-based stock whose valuation is in no way tied to its current earnings power. With each day the stock price rises, the bar for the event just gets higher,” Colas added.
The frenetic rally, which prompted bond billionaire Bill Gross to liken Tesla to a meme stock this week, gained momentum 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 more ferocious momentum.
Tesla is currently the fifth most expensive stock in the S&P 500 index based on its price-to-earnings multiple, well above other mega-cap tech stocks. The company’s shares rose again on Thursday, and if they hold that level throughout the day, it will mark its 12th consecutive trading day of gains.
One risk is that Tesla’s biggest success in AI will depend on whether the technology can solve one of the most complex problems it has ever tackled: building cars that can drive themselves more safely than humans.Analysts and experts generally believe that large-scale, real-world adoption of such technology is probably decades away.
Tesla “has always been about selling hopes and dreams,” says Steve Sosnick, chief strategist at Interactive Brokers. “The fact that this company is worth roughly the same as the entire auto industry doesn’t mean anything if you’re not thinking about the future. But if you think Elon Musk and Tesla are going to change the world, then paying 100 times earnings means nothing.”
Despite the dizzying P/E ratio, the stock price of about $263 is still a long way from its peak of about $410 in November 2021. That’s because Tesla’s stock has made a remarkable recovery but its profits have been declining: in 2021, when the stock price rose 50%, annual profits jumped almost sevenfold.
So it’s not easy to predict whether the stock rally will stop, but trading in the options market suggests investors remain optimistic.
“The options market for Tesla over the next three months is looking extremely bullish,” said Vishal Vivek, equity trading strategist at Citigroup Inc. Options mean traders are expecting a move of more than 9% in either direction when the company reports second-quarter results on July 23, the strategist added.
Traders have been bidding the price of Tesla call options higher than the price of put options, signaling a growing appetite to chase further upside, coupled with further subdued demand to hedge if the stock price falls.
Still, not everyone is brave enough to step on it.
David Wagner, a portfolio manager at Aptus Capital Advisors, which holds shares in the company, said the risk is “too high to put new money into Tesla at this point” because of the uncertainty of what Musk will announce on Aug. 8.
The eye-watering buying spree is also making other market participants nervous that the tide may be turning.
“The biggest risk for Tesla stock is this level of volatility,” said Michael O’Rourke, chief market strategist at Jones Trading. “Typically, this type of volatility is problematic because it works both ways.”
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—With assistance from Carly Wanna, Michael Msika, and Thyagu Adinarayan.
(Adds latest stock price movements in 9th paragraph.)
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