Tesla’s 11-day winning run provides a reality check for valuation

(Bloomberg) — Tesla Inc. shares are soaring, but it’s getting harder to agree with the optimists.

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The last time there was such a run, the rally was supported by double-digit revenue growth. Things look a lot bleaker now: sentiment around electric cars is subdued, Tesla sales are shrinking and profits are collapsing.

Tesla has surged 44% on an 11-day winning streak, its longest since June 2023. The stock now trades at 90 times expected earnings, a level last seen in early 2022, according to data compiled by Bloomberg.

Investors say the rally is driven by traders looking past Tesla’s EV credentials and betting that Elon Musk can transform it into an artificial intelligence powerhouse. The idea is that when Musk finally unveils Tesla’s long-awaited self-driving technology — the so-called robotaxi — on Aug. 8, it will cement the company’s position as a leading AI player.

“Investors were looking for that one breakthrough, a real application of AI,” said Nicholas Colas, co-founder of DataTrek Research. “And now we have someone who has been working on AI for years saying, ‘Hey, I have this killer application.’”

Still, there are numbers that run counter to the current hype surrounding the stock: earnings are expected to fall 21% in 2024 and revenue growth is expected to slow to just 2.2%.

“This is clearly a belief-based stock now, not a stock whose valuations are in any way tied to current earnings power. And every day the stock goes up, the bar for the event gets higher,” Colas added.

The frenetic rally, which prompted bond billionaire Bill Gross to compare Tesla to meme stocks this week, gathered steam after the company’s July 2 sales update suggested the worst of the EV slowdown might be over. But the surge has since gained wilder momentum.

Tesla is now the fifth most expensive stock in the S&P 500 Index based on price-to-earnings ratio, far outpacing the rest of the mega-cap tech companies.

One risk is that Tesla’s ultimate success in AI will depend on solving one of the most complex problems the technology has yet tackled: creating cars that drive themselves more safely than humans. Analysts and experts generally say that mass adoption of such technology in the real world is likely to be decades away.

Tesla has “always traded on hopes and dreams,” said Steve Sosnick, chief strategist at Interactive Brokers. “If you don’t think about the future, the fact that this company is worth almost as much as the rest of the auto industry combined is nonsense. But if you think Elon Musk and Tesla are going to change the world, who cares if you pay 100 times earnings?”

Even with the dizzying price-to-earnings ratio, the stock’s price of around $263 is still a long way from the peak of around $410 it hit in November 2021. That’s because Tesla’s stock is staging a dramatic turnaround, but its profits are shrinking. In 2021, when shares rose 50%, annual earnings rose nearly seven times.

All this doesn’t make it any easier to predict whether the rally is about to break. However, options market trading suggests that investors remain optimistic.

“The Tesla options market positioning has become extremely bullish for the next three months,” said Vishal Vivek, an equity strategist at Citigroup. Options imply that traders are positioning for a move of more than 9% in either direction when the company reports second-quarter results on July 23, the strategist added.

Traders are bidding up the price of Tesla call options versus put options, suggesting increased appetite for the rally to continue, coupled with less demand for hedging in the event the stock price falls.

Yet not everyone is brave enough to make matters worse.

For David Wagner, portfolio manager at Aptus Capital Advisors, which holds the company’s shares, the uncertainty over what Musk will present on August 8 is reason enough to consider the risk “too high to put new money into Tesla at this time.”

The overwhelming buying wave is also causing some concern among other market participants, who fear that the tide will turn.

“The biggest risk for Tesla stock is this level of volatility,” said Michael O’Rourke, chief market strategist at Jonestrading. “Usually this type of volatility goes both ways, so that’s a problem.”

Top tech news

  • Apple Inc. has avoided the threat of fines from European Union regulators by agreeing to make its mobile wallet technology available to other providers for free for 10 years.

  • Rivian is banking on the anti-Tesla crowd for a partnership with VW. The startup convinced Elon-phobic car buyers to drop $70,000 on its EVs. Now it just needs to make money.

  • Investors are increasingly concerned that U.S. technology companies are spending too much money on artificial intelligence, according to strategists at Goldman Sachs Group Inc.

  • India’s Tata Consultancy Services Ltd. reported profit that beat analysts’ estimates, a sign that companies are again spending on projects to capitalize on technologies such as artificial intelligence.

  • Helsing, a startup developing artificial intelligence software for defense, has raised €450 million ($487 million) in venture capital, which it plans to use to expand its presence in European countries bordering Russia.

–With assistance from Carly Wanna, Michael Msika and Thyagu Adinarayan.

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