Will Tesla Stock Bounce Back?

Elon Musk’s Tesla had a stellar year in 2020. Its stock price appreciated eightfold, reaching a record high of over $900 in late-January 2021. Since then, however, Tesla’s shares have undergone a brutal sell-off, dropping 30% to levels that have shareholders concerned.

So, what went wrong? Well, a few things, and we’ll discuss those in this article. But most importantly, the question for investors is this: can Tesla stock bounce back – is the company worth buying at today’s depressed prices? 

Why Did Tesla Stock Drop?

As is so often the case, the reasons for Tesla’s woes cannot be pinned on a single cause. Rather, the electric vehicle maker faced a multitude of headwinds recently, beginning with news that Tesla was losing market dominance in Europe, China and the U.S., where challenges posed by emerging competition and negative reaction to recent price hikes had taken their toll. Indeed, its share of the global EV market dropped from 29% in March to just 11% in April.

Adding insult to injury, Tesla made some unwanted headlines a few months ago, with a high-profile story concerning a fatal car accident involving one of its driverless cars. Throw in an unrelated product recall this month, and the company seems to be fighting a public image battle at the worst possible time.

Furthermore, the ongoing worldwide chip shortage hardly improves Tesla’s outlook, and delays to the firm’s new German production facility don’t help either.

Any of these issues would be enough to rock investor confidence in the business, but taken as a whole they’ve conspired to concoct a perfect storm that has seen Tesla’s share price come tumbling down.

Can Tesla Revenues Hit $1 Trillion?

The automobile industry is populated with well-known and well-established brands that are much less considered growth companies than they are value ones. Names like Volkswagen, Ford, Toyota, BMW and Honda come to mind. They boast such low Price/Sales multiples of 0.45 (Ford) and 0.59 (BMW), and P/E ratios like 9.48 (General Motors) and 10.67 (Daimler).

Contrast this with Tesla, which just posted a P/E of 624 and Price/Sales figure of 16.38. When it comes to judging this company, what works for the wider sector won’t work here.

The problem for Tesla is that it can only justify these numbers on the basis that the firm has exceptional growth prospects in the future.

But is this the case?

The answer may surprisingly be “yes”. The firm is innovating exactly the way a disruptor should be, with an A.I. segment much more advanced than its nearest rival, Alphabet (GOOG), and a ride-hailing platform built on top on this technology potentially generating more than a $1 trillion in revenue within 10 years.

Tesla is also making strides on the efficiency front, both in terms of its battery technology and its infrastructure projects. Its management believes it can cut capital expenditures with its new 4680 battery cell, and pass these savings onto customers with a cost per kilowatt-hour 10% cheaper than its closest competitor.

The fact that Tesla also hit analysts’ expectations in its last quarterly earnings suggests its business plan is still on track. The company’s revenue of $10.3 billion beat predictions by $112 million, and it outperformed on earnings by $0.15 per share. 

Tesla China Sales Weakened Against Expectations

In addition to the problems already facing Tesla recently, and which led to its share price plunging of late, the company also faces some uncertainty with its order book and the idiosyncrasies of its founder and talisman.

First, Tesla’s China market appears to be shrinking – and so too are its sales there. Technology news gazette The Information reported that Tesla’s month-on-month vehicle orders dropped by half in May, while the China Passenger Car Association claimed that the electric-car maker’s sales fell 27% in April too.

Worryingly, this comes against a backdrop of strengthening car sales in China, which also saw a post-pandemic surge in electric vehicle purchases tripling to 163,000.

Second, news broke this month that SEC officials warned Elon Musk that several of his messages posted on micro-blogging site Twitter twice contravened a court order requiring his tweets first be vetted by Tesla company lawyers prior to publication.

While the substance of the tweets weren’t unknown – they relate to Musk’s earlier claims about his intention to buyout his own company – the fact that his activity on that site was subject to pre-approval by counsel certainly was. And even though this story might be old news, it undermines trust in the company’s leadership, and injects further uncertainty in the decision-making integrity of Tesla’s executive team.

Is Tesla Stock A Buy? And Will It Bounce Back?

Assuming Tesla can maintain its strong momentum through the next quarterly earnings filing in July, investors should be optimistic that this will prove a positive catalyst – and could help drive its share price up from there. Its current share price has been trading sideways for the last month, and there’s the sense that the stock is waiting for an excuse to move in one way or the other.

The company has weathered many damaging headwinds in the past, and its Model S Plaid delivery event turned out to be a damp squib – especially after revealing its Model S Plaid Plus has had to be cancelled. 

However, if Tesla can deliver a hit with some positive public relations news – and change the sentiment surrounding its brand – the company might be ready to turn the corner and start trending northwards once again.

The bottom line is the short-term risks are high but as Elon Musk’s old partner Peter Thiel once stated “Never Bet Against Elon” – perhaps sage advice from the billionaire Facebook investor.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.