Here’s an astonishing fact that got me thinking last week. According to last Wednesday’s Financial Times, more than half of this year’s rise in the S&P 500 index is down to just five stocks. These five mega-cap tech stocks have exploded to dominate current market valuations. But prices of these super-stocks look stretched, while the S&P 500’s real earnings yield is at a record low. And one of the biggest contributors to this “too rich and too thin” market is Tesla (NASDAQ: TSLA).
Tesla stock soars in 12 months
Before discussing Tesla as a company, I’ll review its stock’s spectacular price action. Over the past five years, TSLA has enjoyed the most incredible run. Since 23 December 2016, the stock has risen more than 20-fold (+1,997.8%). This makes Tesla shareholders among the biggest winners of the past decade. No wonder so many worship Elon Musk as though he were the high priest of a high-tech cult.
Over the past 12 months, Tesla stock has leapt by 37.8%. It has also surged by 44.2% over the past six months and 22.6% over the past three months. But having peaked in early November, the shares have crashed since then. As I write, Tesla stock trades at $895.98, down $37.42 (-4%) today. What’s more, the share price is down 22.6% in one month. In addition, it has collapsed by 27.9% since hitting an all-time high of $1,243.49 on 4 November. In other words, TSLA is currently in a bear market, having fallen by more than 20% from its peak. Yikes.
Tesla is a great business, but TSLA is extremely volatile
At the current share price, Tesla’s market cap is around $900bn. Yet its earnings are miniscule, relatively speaking — which is why the stock trades on a price-to-earnings ratio of almost 292. This gives an earnings yield of 0.34% (pretty close to zero). In short, much of Tesla’s current valuation relies on its earnings massively multiplying in future. Given that Tesla has cutting-edge technology — including world-leading battery tech — this might actually happen. But for the stock to be reasonably valued, it would have to sell, say, 10m+ cars a year. This would put the group up there with global giants Toyota and Volkswagen. Meanwhile, in the real world, analysts expect Tesla to deliver around 900k cars this year and at least 1.3m in 2022.
However, what’s been driving Tesla stock in 2021 is massive volumes of options trading. Millions of retail investors have been buying TSLA call options, using leverage to bet that the price will keep rising inexorably. Given that the stock has dived by almost three-tenths since 4 November, many of these punters will have had their fingers burnt. This may discourage speculators from betting on Tesla stock to keep on rising.
I wouldn’t buy Tesla today
For the record, I don’t own Tesla stock and I wouldn’t buy at current price levels. As a veteran value investor, I much prefer to buy into companies on low ratings with high dividend yields. Of course, this means that I’ve missed the boat big-time with TSLA, but I’m fine with that. At least I can sleep easily. However, I’d never be so brave as to short Tesla, simply because too many hedge funds have been undone by this trade. And for the record, I absolutely don’t see TSLA leaping by close to another 38% in 2022!
Cliffdarcy has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services, such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool, we believe that considering a diverse range of insights makes us better investors.
