Tech

Tesla's 11-Day Surge Faces Valuation Scrutiny, AI Hopes

Tesla shares surge 44% in 11 days, now trading at 90 times forward earnings amid AI optimism.

By Barry Stearns

7/11, 08:39 EDT
Tesla, Inc.
article-main-img

Key Takeaway

  • Tesla's stock surged 44% over an 11-day winning streak, trading at 90 times forward earnings amid AI-driven optimism.
  • Despite the rally, earnings are projected to drop by 21% in 2024, with revenue growth slowing to 2.2%.
  • Options market shows bullish sentiment, but some investors remain cautious due to high valuation and uncertainty around AI developments.

Tesla's Recent Stock Surge

Tesla Inc. shares have experienced a significant surge, climbing 44% over an 11-day winning streak, the longest since June 2023. The stock now trades at 90 times forward earnings, a level last seen in early 2022, according to Bloomberg data. This rally has been driven by investor optimism surrounding Tesla's potential transformation into an artificial intelligence (AI) powerhouse, particularly with the anticipated unveiling of its self-driving technology, the so-called robotaxi, on August 8. Nicholas Colas, co-founder at DataTrek Research, noted, "Investors have been looking for that one breakthrough, real-world application of AI, and now we have someone who has been working on AI for years saying ‘hey, I have got that killer application.’"

Despite the excitement, some numbers challenge the current buzz. Earnings are projected to drop by 21% in 2024, and revenue growth is expected to decelerate to just 2.2%. Colas added, "This is clearly a faith-based stock now, not one whose valuations are in any way tied to current earnings power, and every day the stock rallies the bar for the event just gets higher."

Market Reactions and Comparisons

The rally gained momentum after Tesla's July 2 sales update suggested that the worst of the electric vehicle (EV) slowdown might be over. However, the surge has since taken on a wilder momentum, with Tesla now being the fifth-most expensively priced stock in the S&P 500 Index on a price-to-earnings basis, far surpassing other megacap technology stocks. Bond billionaire Bill Gross compared Tesla to meme stocks, highlighting the speculative nature of the current rally.

One significant risk is that Tesla's success in AI hinges on solving the complex problem of creating self-driving cars that are safer than human drivers. Analysts and experts generally believe that mass adoption of such technology is likely decades away. Steve Sosnick, chief strategist at Interactive Brokers, remarked, "Tesla has always traded on hopes and dreams. If you’re not thinking about the future, the fact that this company is worth almost as much as the rest of the auto industry combined doesn’t make sense. But if you think Elon Musk and Tesla are going to change the world, so what if you’re paying 100 times earnings?"

Financial Performance and Projections

Despite the high price-to-earnings ratio, Tesla's share price of about $263 is still far from its peak of approximately $410 in November 2021. While the stock is staging a spectacular turnaround, its earnings are shrinking. In 2021, when the stock rose 50%, annual profit jumped nearly seven-fold. The current rally's sustainability remains uncertain, but trading in the options market suggests continued investor optimism. Vishal Vivek, an equity trading strategist at Citigroup, stated, "Tesla options market positioning over the next three months has become extremely bullish." Options imply traders are positioning for a more than 9% move in either direction when the company reports second-quarter results on July 23.

Traders are bidding up the price of Tesla calls relative to puts, indicating a desire to chase the rally further, coupled with more muted demand for hedges in case the stock slumps. However, not all investors are confident. David Wagner, portfolio manager at Aptus Capital Advisors, which holds Tesla shares, expressed caution, saying the uncertainty around what Musk may present on August 8 makes the risk "too high right now to be investing new money into Tesla."

Street Views

  • Nicholas Colas, DataTrek Research (Bullish on Tesla):

    "Investors have been looking for that one breakthrough, real-world application of AI. And now we have someone who has been working on AI for years saying ‘hey, I have got that killer application.’"

  • Steve Sosnick, Interactive Brokers (Neutral on Tesla):

    "Tesla has always traded on hopes and dreams. If you’re not thinking about the future, the fact that this company is worth almost as much as the rest of the auto industry combined doesn’t make sense. But if you think Elon Musk and Tesla are going to change the world, so what if you’re paying 100 times earnings?"

  • Vishal Vivek, Citigroup (Bullish on Tesla options market positioning):

    "Tesla options market positioning over the next three months has become extremely bullish."

  • David Wagner, Aptus Capital Advisors (Cautiously Optimistic on investing in new money into Tesla):

    "The uncertainty around what Musk may present on Aug. 8 makes the risk too high right now to be investing new money into Tesla."

  • Michael O’Rourke, Jonestrading (Bearish due to volatility concerns):

    "The biggest risk to Tesla shares is this level of volatility. Usually when you have this type of volatility it works in both directions so that’s a problem."