The recent sell-off in tech stocks is gaining momentum. After hitting a high of 16,212 points last year, the Nasdaq Composite fell more than 12% to 14,149 points.
The market correction over the past few months has not spared any company, not even Tesla. Since the beginning of November, this investor favorite has lost more than a quarter of its all-time high market capitalization.
As Tesla's stock price has fallen, some investors are wondering if they should take this opportunity to add to their stock holdings. Let's take a look at the pros and cons of buying Tesla stock right now.
As a company, Tesla is on a roll right now. After producing a record 237,000 vehicles in the third quarter of 2021, the electric car maker has ramped up production to reach another record 306,000 vehicles in the fourth quarter of 2021. The company ended the year with a solid 83% year-over-year increase in production to just under 1 million vehicles.
Along with its strong operating performance, Tesla also posted its second profitable year under generally accepted accounting principles (GAAP) and free cash flow of $5 billion - and that's after the company spent more than $11 billion on capital spending. Those are good numbers, considering the company was on the verge of bankruptcy several times in its early days. Thanks to its beloved electric vehicles (EVs) and the leadership of its one-of-a-kind CEO, Elon Musk, Tesla is slowly becoming the iconic company that all optimists dreamed of.
While Tesla is producing a record number of electric cars - management expects deliveries to grow by an average of 50 percent a year over the next few years - Musk is not satisfied with being just an electric car manufacturer. He is betting that other projects, such as autonomous cars, ridesharing, renewable energy, and, most recently, a robotic humanoid that helps people perform repetitive tasks, will help support Tesla's long-term growth.
In short, Tesla intends to continue to show explosive growth for the foreseeable future. And with Musk at the helm, the sky seems to be the only limit for the company.
Bulls are excited about all the great things Tesla can accomplish in the future. However, grandiose plans aside, Tesla is first and foremost a car company (at least for now), and it will have to face all the challenges of the industry.
For example, the automotive industry is known to be a complex industry with fierce competition. Tesla may lead the emerging electric car market, but there is no guarantee that it cannot be overtaken by both existing and new companies. For example, BYD recently sold about 93,000 electric cars in China in December 2021, not that far from Tesla's average monthly sales of about 102,000 in the fourth quarter of 2021. In the U.S., companies such as General Motors and Ford Motor Company are ramping up the production of electric cars as the trend toward electrification gathers momentum. In other words, competition will inevitably intensify over time.
In addition, Tesla stock is trading at a significant premium over its peers. For example, Tesla stock trades at a price-to-sales (P/S) ratio of more than 22, while GM stock trades at a ratio of less than 1. Bulls argue that Tesla stock deserves a premium because of its prospects. This is a perennial argument that even bears now agree with, at least to some extent. Nevertheless, the next question arises: does the company deserve such a steep premium? Probably not.
Many factors could cause Tesla's high valuation to drop. To begin with, the bulls may change their minds about the automaker's prospects - after all, most of Tesla's futuristic plans are still in the pipeline. In addition, there is no guarantee that Tesla can continue to perform well - the recent recall involving repeated use of the front trunk lid that accidentally caused the rearview camera to fail is an example of what could happen.
Tesla is a one-of-a-kind company led by a visionary CEO. Nevertheless, the stock remains very expensive, even after recent price declines. Much of Tesla's current market capitalization depends on Musk's impeccable performance in the coming years to expand its existing electric car business and deliver on other promises, such as robotic and autonomous cars. That's too much to expect from the company. Bulls with such high hopes are setting themselves up for potentially huge disappointments.
So unless you are risk-averse and an ardent Tesla fan, it would be wise not to bet your hard-earned money on the company's stock. At least not at its current valuation.
As long as price is below 1002.00, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 903.54
- Take Profit 1: 885.00
- Take Profit 2: 816.00
Alternative scenario:
If the level of 1002.00 is broken-out, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 1002.00
- Take Profit 1: 1050.00
- Take Profit 2: 1175.00
