Tesla’s Troubles

Published On: January 5, 2023

Written by: Ben Atwater and Matt Malick

If you are a regular reader of these notes, you may recall our musings on Tesla stock (TSLA). We have long viewed Tesla as a personification of the bull market and a bubble that would inevitably burst. If Tesla was an embodiment of the excesses, then its fall might be a promising development.

We think it is safe to say, for now, that the Tesla bubble has burst. As of this writing TSLA is down 73.5% from its all-time high, exceeding its previous worst decline of just over 60% in the March 2020 COVID crash.

We are contrarian investors. We like investments that go against the prevailing sentiment because crowd behavior often leads to exploitable mispricing in securities markets. In our minds Tesla was too popular, as were many other stocks.

Despite the hype in recent years about “innovation” and tech stocks, Tesla’s business is manufacturing cars. No mental gymnastics can change the fact that Tesla is a carmaker.

Right or wrong, car companies historically sport low valuations. After all, it is a highly competitive business with large capital investment requirements. And no single manufacturer even claims a double-digit market share.

For example, Ford sells for 5.5 times its forward earnings, while General Motors sells for 4.5 times its forward earnings. Tesla, on the other hand, sells at 27 times its forward earnings, still a healthy premium but down dramatically from 188 times forward earnings in November of 2021.

Tesla likely deserves a growth premium over Ford and General Motors, but the premium back in November 2021 was excessive. Although the stock is oversold in the short term and likely to rally at some point, it may not be done with its fall. Bubble stocks like Tesla often see 80% to 90% drawdowns.

When bubble stocks finally deflate as part of a larger bear market, it often signals a bottom for the broader bear market. Just maybe Tesla is telling us we are closer to the bottom and that perhaps 2023 will bring brighter days? Only time will tell but hope springs eternal.