Tesla Inc. has experienced a significant surge in its stock price over the past month, leading to questions about the sustainability of this rally. Unlike previous rallies, which were supported by strong revenue growth, the current mood around electric cars is more subdued, with Tesla’s sales and profits declining. Despite a setback from the delayed reveal of Tesla’s robotaxi fleet, investors remain hopeful that Elon Musk can transform the company into an artificial intelligence (AI) powerhouse. However, Tesla’s financial projections indicate a potential drop in earnings and decelerating revenue growth.
The frenzy surrounding Tesla’s stock rally has led some to view it as a faith-based stock, disconnected from current earnings power. While the July 2 sales update hinted at the end of the electric vehicle (EV) slowdown, the rally has taken on a wild momentum. As a result, Tesla now has one of the highest price-to-earnings ratios in the S&P 500 Index, far surpassing other technology giants. However, one key risk for Tesla’s success in AI lies in solving one of the most complex challenges in the field – developing self-driving cars that are safer than human drivers. Experts believe that widespread adoption of this technology is still decades away.
Tesla has always been seen as a company trading on hopes and dreams. While its stock price has experienced a remarkable turnaround, its earnings have been shrinking. Despite its high valuation, many investors are willing to pay a premium for Tesla’s stock based on their belief in Elon Musk’s ability to change the world. Although the stock is still far from its peak in November 2021, uncertainty surrounding Musk’s upcoming presentation on August 8 has made some investors cautious about investing in Tesla at this time.
Options trading suggests that investors remain bullish on Tesla’s prospects in the short term. Traders are bidding up the price of Tesla calls, indicating a desire to continue riding the rally, while demand for hedges to protect against a potential downturn is relatively low. However, not all investors are confident enough to join the buying frenzy. Some, like portfolio manager David Wagner, believe the risk is currently too high to invest new money into Tesla.
The extreme volatility in Tesla’s stock price is a cause for concern among market participants. Typically, this level of volatility can work in both directions, and some worry that the tide may turn against Tesla. Ultimately, whether the rally will continue or break is uncertain, but traders and investors should be prepared for potential shifts in the stock’s value.
In conclusion, while Tesla’s stock has experienced a remarkable surge in recent weeks, there are several factors that cast doubt on the sustainability of this rally. Tesla’s sales and profits are declining, projections indicate future earnings drops, and the company has a history of missing self-imposed deadlines. The success of Tesla in AI relies on solving complex problems around self-driving technology, which experts believe is still years away from widespread adoption. Nevertheless, investors remain optimistic, and options trading suggests a bullish outlook in the short term. However, caution should be exercised due to the extreme volatility in Tesla’s stock price.
