Tesla Stock’s First Stumble in 2020: Beginning of the End or a Speed Bump?

Tesla Stock’s Roaring 20s

For all the manifold horrors 2020 has wrought on humanity, Tesla Inc (NASDAQ:TSLA), investors have had at least a small, measured victory worth celebrating: 700% gains. That’s right, Tesla stock is up so high right now that it may as well be Elon Musk’s other venture, SpaceX.

But, while TSLA stock has been largely immune to the pandemic and resultant economic downturn, there is one calamity that it is going to have to face: haters.

Chart courtesy of StockCharts.com

It’s no secret that Tesla stock has a good number of doomsayers and skeptics. And, to be fair, as bullish as I am on TSLA stock, they’re not wrong in their analysis…at least at its face.

Tesla Inc does have an absurd price-to-earning ratio (P/E) somewhere in the 400s.

For a reference point, you should know that many stocks on the Nasdaq and the New York Stock Exchange tend to feel that a 10-15 P/E is a healthy ratio to maintain.

Now, this isn’t exactly rare for a tech stock. Facebook, Inc. (NASDAQ:FB), for instance, had a very high P/E ratio for years before it started to earn some real cash, with investors who braved the higher numbers to invest early having been highly rewarded.

But there are of course tales of other companies with astronomically high P/E ratios that were then never able to live up to the hype, leaving investors high and dry as the stock began a long descent down.

Is there concern that Tesla stock could eventually dwindle like that? Yes. But a far more likely scenario in my view is that we’re looking at another Facebook instead of a bust.

The reason being that Tesla Inc, for all its fanciful promises (and they are many), has been largely able to deliver.

Create an electric car company that can challenge the legacy auto manufacturers? Check. Produce an affordable and long-range version of an electric car for everyday consumers? Check. Dot the earth with Gigafactories that will help keep the company up with intense demand for these vehicles? Check.

The track record for Tesla Inc, in other words, isn’t perfect, but it is quite good.

On the flip side, there is a bit of investor fantasy when it comes to Tesla stock. By that I mean that Tesla Inc receives a more-than-normal amount of attention from everyday retail investors. It receives a ton of attention from institutional investors too, don’t get me wrong, but there are many everyday consumers who want a piece of TSLA stock.

And that makes sense. After all, investors typically like to buy into products they can see and, in the case of Tesla Inc, even own.

A good example of this retail investor fancy surrounding TSLA stock can be found on the “Robinhood” investing app, which is especially popular among younger investors. About 40,000 Robinhood accounts added Tesla shares in a four-hour period on July 13. (Source: “Ten Thousand Day Traders an Hour Are Buying Tesla Shares,” Bloomberg, July 13, 2020.)

But retail investors, in general, aren’t always the savviest or most diligent buyers. I’d bet that the average buyer on Robinhood hasn’t never looked into the P/E ratio…or even knows what it is.

So, there is a bit of daydreaming when it comes to this subset of investors. And institutional investors aren’t immune either; many, myself included, see Tesla stock and salivate over all the ways in which the company could dominate the future of renewable technologies. (Even though it’s safe to assume that this space will undergo a huge transformation in the coming years, especially as countries impose ever stricter laws on emissions.)

This is what makes Tesla stock so enticing; after all, the company has the potential to be not just the biggest automaker on the planet, but also easily one of the biggest tech firms in the world for decades to come.

The reason for this being that one of the big teases Musk has been known to play on has to do with solar panels and solar-powered batteries in general.

These could represent the renewable energy source of the future, powering homes around the globe. If that comes to pass, well, you can imagine that Tesla stock’s price right now would hardly be considered overvalued.

“The future that we all want is the future where you look around and the roofs are gathering energy and doing something useful,” Musk said in an interview at the beginning of the year. (Source: “Tesla’s Next Big Challenge Is Bringing Solar Roofs to Superfans,” Bloomberg BusinessWeek, February 19, 2020.)

Tesla’s “Solar Roof” is a mix of glass roof tiles and solar energy-collecting tiles made at Tesla’s factory in Buffalo, New York.

In fact, a lot of growth in Tesla stock this year was based on the hype surrounding “Battery Day,” which just took place. Many analysts were hoping for a big reveal as the name seemed to suggest, but they were largely left hanging.

Tesla Inc did reveal cost-cutting measures for batteries and a cheaper Tesla model on the way, but, as far as revolutionary, global-energy-transformational tech, this wasn’t really on offer, disappointing investors. (Source: “Tesla’s Battery Day Letdown Risks $320 Billion Stock Gain,” Yahoo! Finance, September 23, 2020.)

And that brings us, at last, to the first stumble in Tesla stock’s otherwise immaculate 2020: the company experienced a roughly six-percent decline over the past month.

Chart courtesy of StockCharts.com

Now, this isn’t only due to the “Battery Day” disappointment or the perception that Tesla stock is overvalued. Part of it actually has to do with the pandemic potentially hitting a second wave while U.S. Congress remains inactive, not providing succour for either Wall Street or Main Street (a topic for another time).

Still, there is no doubt that Tesla stock’s huge gains in 2020 make it vulnerable to a correction, and even the slightest misstep could bring the wolves howling.

With that being said, even if there are times that Tesla stock will inevitably give back some of its absurd gains in 2020, overall, the future of the company is only going to continue to trend upwards as it develops its green tech.

While it does remain vulnerable to threats from other tech companies, it is so far ahead that it would be difficult for another to catch it.

Even Wall Street, a long-time doubter of TSLA stock, is starting to come around. Joe Osha, an analyst at JMP Securities LLC, was impressed by Tesla Inc’s recent sales figures and upgraded the company’s outlook.

“If the company can manage 90K units during an extraordinarily challenging quarter, there is no reason that TSLA cannot be shipping 130K to 140K units a quarter by the end of the year in our opinion. That puts TLSA on a trajectory to ship 757K units in 2021,” said Osha. (Source: “Tesla Will Surge Another 24% Over the Next Year as It Grows to $100 Billion in Revenue by 2025, Says New Biggest Bull on Wall Street (TSLA),” Business Insider, July 6, 2020.)

Projections now have the company delivering over 2.5 million vehicles, hitting $100.0 billion in revenue, and having an earnings before interest, taxes, depreciation, and amortization (EBITDA) margin of 20% by the end of 2025.

“We believe that TSLA is a category killer that is still early in the process of building a dominant position in electric vehicles, and the stock needs to be valued in comparison to other similarly successful companies,” added Osha.

Piper Sandler Companies, a respected investment bank, has similarly gushed about Tesla Inc’s future.

“It’s hard to see how competitors can catch up,” said Piper Sandler. (Source: “Tesla Will Continue Its Monster Run and Jump Another 55% to $2,322, Wall Street Firm Says,” Business Insider, July 14, 2020.)

Analyst Take

There is no doubt in my mind that TSLA stock will undergo a correction in the future as a result of its 700% year-over-year gains. But there is also little doubt that this correction will end up being little more than a speed bump, so long as Tesla Inc can keep investors excited with its technological outlook and killer products angled towards the future.