Electric vehicle maker Tesla (TSLA) seemed almost bulletproof for the last three months. However, the price has declined since last week. The reason is a little baffling and doesn’t seem much connected to Tesla products at all. For this reason, I am bearish on Tesla stock. (See Analysts’ Top Stocks on TipRanks)
Tesla’s stock was on an 11-week upward cant and almost looked to make it three full months of consecutive gains. However, the arrival of early November threw a wrench in those plans, and Tesla saw its first down week since back in May. Now, Tesla appears to be hovering close to $1,000 per share. (See Tesla stock charts on TipRanks.)
The biggest hit to Tesla stock seems to stem from CEO Elon Musk, who sold around $7 billion worth of stock in the last week. Musk also used the stock sale as a goad against Senator Bernie Sanders. First, Musk noted that he “…keeps forgetting that you’re (Sanders) still alive”. Musk then offered a bizarre challenge to Sanders, saying, “Want me to sell more stock, Bernie? Just say the word….”
When Elephants Fight, Smaller Animals Flee
The biggest problem with Tesla right now is its seeming disconnect from fundamentals. The company didn’t enjoy an 11-week run-up because it built new products or pursued new markets. The company didn’t lose that 11-week run-up because a new competitor entered the market, or it had to stage a recall. Much of what we have seen for the last several months in Tesla stock is directly connected to the cult of personality around Elon Musk. That’s a big problem for investors because it’s never immediately clear what the next likely step for the company is.
Word out of Michael Burry suggests that Musk’s stock sale was designed to realize profit instead of raising cash for the company. That’s all fine and well—Musk has to eat too, after all—but it doesn’t help shareholders much. In fact, Musk’s sale of Tesla stock seems more politically motivated than anything. The likely reason for Musk now selling stock is to take advantage of better tax terms. Musk’s plan to sell now means less to sell later. If Musk sells before the government can call for further tax law changes, that’s less for the government to realize later.
Granted, Burry—via his Scion Asset Management—has been bearish on Tesla for some time. The company has been short Tesla since last December. It has also got put options on the company tracing back to June 30. However, in October, Burry also noted to CNBC that he was no longer short Tesla. That may have changed with the latest reversals, however.
The problem here is that Tesla is a meme stock and has been for some time now. Meme stocks are all fine and well. They’re an exciting way to catch a run-up if you can find one close enough to the beginning. It’s clear now that social media has significant power to drive a stock up or down. If it weren’t before, it would be now. However, Tesla has likely already benefited from the meme stock effect. The rest of the market is seeing similar inflation. Rivian (RIVN) had a massive IPO. Reports already suggest its likelihood of maintaining meme status even in the electric vehicle field is unlikely.
Wall Street’s Take
Turning to Wall Street, Tesla has a Hold consensus rating, based on 10 Buys, six Holds, and seven Sells assigned in the past three months. The average Tesla price target of $850.24 implies 18.1% downside potential.
Analyst price targets range from a low of $215 per share to a high of $1,400 per share.
Concluding Views
Joining in on the early rush of a meme stock can be an excellent way to realize quick gains. If you get in early enough, that is. Tesla, however, has enjoyed the meme stock effect for some time now. Its fundamentals aren’t half bad, but the company isn’t generating much reason to buy in as of late. Sure, Tesla is pretty much the leader in the electric vehicle market. Given its overall size, though, that’s not saying much.
Investing in Tesla right now is investing just off the company’s highs. The likelihood of further losses for Tesla is much higher than further gains. With that in mind, it’s likely a good plan to stay out of Tesla until the market can discover its proper valuation.
Disclosure: At the time of publication, Steve Anderson did not have a position in any of the securities mentioned in this article.
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