(Bloomberg) — Shares of Tesla Inc. are rising at a breakneck pace, but it’s getting harder to make the case for the bulls.
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The last time there was a run like this, the rally was supported by earnings expanding at a double-digit clip. Things look much bleaker now: the mood around electric cars is subdued, Tesla’s sales are shrinking and its profits are falling.
Tesla is up 44% through Wednesday during an 11-day winning streak that is its longest since June 2023. Shares now trade at 90 times forward earnings, a level last seen in early 2022. according to data compiled by Bloomberg.
Investors say the surge is due to dealers seeing 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 robotaxis — on Aug. 8, it will cement the company’s position as a major AI player.
“Investors have been looking for that one breakthrough, real-world application of AI,” said Nicholas Colas, co-founder at DataTrek Research. “And now we have someone who’s been working in AI for years saying ‘hey, I’ve got that killer app.'”
However, some numbers fly in the face of the current hype around the stock: earnings are set to fall 21% in 2024 and revenue growth is seen slowing to just 2.2%.
“This is definitely a faith-based stock right now, not a stock whose valuations are in any way tied to actual earnings power, and every day the stock raises the bar for the event it just gets higher,” Colas added.
The frenzied rally, which prompted bond billionaire Bill Gross this week to compare Tesla to meme stocks, gathered steam after the company’s July 2 sales update suggested the worst of the EV slowdown may be over . But growth has since taken on a wilder momentum.
Tesla is now the fifth most expensive stock in the S&P 500 on a price-to-earnings basis, far outpacing the rest of the tech megacap group. Shares rallied again on Thursday, which if held through the rest of the day, will mark 12 straight sessions of gains.
One risk is that Tesla’s crowning success in AI rests on solving one of the most complex problems the technology has yet tackled — creating cars that drive themselves more safely than humans. In general, analysts and experts believe that mass real-world adoption of such technology is likely decades away.
Tesla has “always traded on hopes and dreams,” said Steve Sosnick, chief strategist at Interactive Brokers. “If you’re not thinking about the future, the fact that this company is worth almost as much as the rest of the auto industry combined doesn’t make sense. But if you think Elon Musk and Tesla are going to change the world, what if you pay 100 times earnings?”
Even with the staggeringly high PE ratio, the stock price of around $263 is a long way from the peak of around $410 reached in November 2021. That’s because while Tesla’s stock is making a spectacular turnaround, its earnings are smaller. In 2021, when the stock rose 50%, the annual profit increased almost sevenfold.
None of this makes it any easier to predict whether the rally will break. However, trading in the options market suggests that investors remain optimistic.
“Tesla’s options market positioning over the next three months has become extremely good,” said Vishal Vivek, an equity trading strategist at Citigroup. The options mean 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 pricing Tesla’s calls relative to puts, indicating increased desire to pursue growth further, along with muted demand for protection should the stock fall.
However, not everyone is feeling brave enough to bundle up.
For David Wagner, portfolio manager at Aptus Capital Advisors, which holds shares of the company, the uncertainty about what Musk might unveil on August 8 makes the risk “too high right now to put new money into Tesla.”
The dizzying wave of buying is also a cause for concern for other market participants, worried that the tide could be turning.
“The biggest risk for Tesla stock is this level of volatility,” said Michael O’Rourke, chief market strategist at Jonestrading. “Usually, when you have this kind of volatility, it works both ways, so that’s a problem.”
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–With help from Carly Wanna, Michael Msika and Thyagu Adinarayan.
(Adds the latest stock move in the ninth paragraph.)
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