Speculative Valuation Results in Tesla's Share Price Volatility
Throughout its history, Tesla (TSLA) and its controversial CEO, Elon Musk (who, up until very recently, was the richest man in the world), have been at the center of a tug-of-war between value oriented and growth oriented investors.
Tesla has no shortage of doubters, with investors and analysts alike questioning the company’s growth strategy, capital allocation, and most frequently, the stock’s valuation. However, the stock’s performance speaks for itself, with the company’s market cap currently sitting at $712 billion.
Tesla, which is best known for its cutting edge technology, has not proven itself capable of producing reliable profits. Throughout its operational history as a publicly traded company, Tesla has posted negative earnings-per-share results more often than it has positive ones.
From 2010-2012 and then again, from 2015-2018, Tesla produced negative earnings-per-share. In 2019, Tesla’s annual earnings-per-share turned positive, at $0.01. In 2020, that annual figure rose to $2.24. And, peering into the future, the consensus analyst estimate for Tesla’s bottom-line results continue to rise higher, with analysts calling for 85% growth in 2021, 42% growth in 2022, and 22% growth in 2023. However, even with these double digit growth prospects in mind, many investors still have a hard time wrapping their heads around the triple digit price-to-earnings ratios that apply to this stock.
Right now, Tesla trades with a blended price-to-earnings ratio of 269.33. This implies that the market is pricing in major growth over the long-term. However, valuations that are based upon expectations that lie so far out into the future are highly speculative, which creates volatility in share price movement.
This Isn’t Your Grandfather’s Car Company
And speaking of volatility, Luke Lango, Senior Investment Analyst at InvestorPlace, who receives a 5-star ranking by Nobias for his work, recently highlighted Tesla’s outperformance. He said, “At the start of 2020, this was a $90 stock. Recently, the TSLA stock price peaked at $900. In essence, then, Tesla stock has increased by 10X in just 14 months.”
During this 14-month period, the S&P 500 (which Tesla joined in December of 2020) was up a comparatively smaller 21.6%. However, since making its all-time high in January, Tesla shares have experienced weakness. The stock is down 22.55% during the last month, and down approximately 13.6% during the last week alone.
Much of this negative volatility appears to be attributed to rising interest rates and the sell-off that the U.S. 10-year yield has inspired amongst high growth/speculative valued equities. However, Lango believes that these interest rate headwinds will prove to be temporary and taking a longer-term view, he says that this recent weakness in Telsa stock is going to prove to be a buying opportunity.
“You see… Tesla isn’t a car company. It’s an energy company. Tesla is figuring out to how harness clean energy and use to power the world,” Lango, who is known for his bullishness on innovation, notes that widespread use of Telsa’s energy storage technology could have helped to solve the recent power outage catastrophe that we saw play out in Texas.
“Indeed, in that world, no one loses power, anywhere, ever. Everyone is always powered.” Lango continues, “This is the future. And Tesla is at the epicenter of this future as one of the two leading companies in the energy storage space. Further, the company should be able to leverage its branding power — everyone knows the Tesla name and brand (and importantly, trusts it), while other players in this space are far from household names — to remain one of the largest player in energy storage for the foreseeable future.” Lango’s piece culminates in this bullish statement, “To that end, this dip in TSLA is a gift. Use it to buy the dip,” showing that not everyone is bearish when it comes to this company’s questionable fundamentals these days.
Tesla Makes Headlines By Adding Bitcoin To Its Balance Sheet
When tracking the 5-star analysts who cover Tesla, we’ve noticed that the company’s earnings statement and speculative growth prospects aren’t the only catalyst that is impacting TSLA stock. Recently, the company made big news with regard to its balance sheet with $1.5 billion investment in bitcoin. Much like TSLA shares, bitcoin has proven itself to be a very volatile and seemingly speculative investment. With this in mind, by tying itself to bitcoin in such a big way, Tesla’s management team has essentially accepted the volatility that comes along with digital currency.
Matthew Fox, a 5-star Nobias analyst who covers crypto-currency for Business Insider, recently covered Tesla’s big move into bitcoin. He noted that in a recent regulatory filing, Tesla said, "In January 2021, we updated our investment policy to provide us with more flexibility to further diversify and maximize returns on our cash that is not required to maintain adequate operating liquidity.”
Fox reports that in Tesla’s filing, the company said, "We may invest a portion of such cash in certain alternative reserve assets including digital assets, gold bullion, gold exchange-traded funds and other assets as specified in the future." This move away from cash is an interesting one, because traditionally, the U.S. dollar is seen as a conservative store of wealth. However, in a recent tweet, Elon Musk quickly summarized his rationale for moving into crypto, saying, “Money is just data that allows us to avoid the inconvenience of barter. That data, like all data, is subject to latency & error. The system will evolve to that which minimizes both.”
But, Musk’s company also acknowledges the risks that come with owning crypto. Fox’s reporting shows that such risk is discussed in the recent regulatory filing, with the company stating: "As intangible assets without centralized issuers or governing bodies, digital assets have been, and may in the future be, subject to security breaches, cyberattacks, or other malicious activities, as well as human errors or computer malfunctions that may result in the loss or destruction of private keys needed to access such assets." Yet, when it comes to investment markets, with risk comes reward. While some of Tesla’s recent sell-off has been attributed to bitcoin’s volatility, there are well known analysts who’re on board with companies placing bets on crypto.
Fox highlighted a recent note by famed Wedbush technology analyst Dan Ives, centered around Tesla’s move into bitcoin, which said, “This move could put more momentum into shares of Tesla as more investors start to value the company's bitcoin/crypto exposure as part of the overall valuation."
Tesla Isn’t Alone
Tesla isn’t the first big-tech company to adopt bitcoin as a cash alternative/investment/payment strategy. In October of 2020, Square made big news, purchasing 4,709 bitcoins, at an average cost of $10,617, for a total investment of $50 million. Fox also covered that announcement, highlighting Square’s statement: "Square believes that cryptocurrency is an instrument of economic empowerment and provides a way for the world to participate in a global monetary system.”
Fox noted that, “In 2018, it [Square] launched the ability to buy and sell bitcoins within its Cash app, and in 2019, the company formed Square Crypto, a team solely focused on open-source work in the crypto space.” In October of 2020, Square wasn’t the only digital payments company entering into the world of cryptocurrency. Paypal began to accept bitcoin as payment then as well.
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
On the heels of that announcement, Ben Winch, of Business Insider, reported that billionaire investor, Mike Novogratz, came out with a bullish opinion on the move, saying that it was an “exciting day” for cryptocurrency and that, “All banks will now be on a race to service crypto. We have crossed the rubicon people." Tesla’s recent purchase appears to validate this idea. And, more recently, on February 23rd, 2021, Square added to its bitcoin holdings. The company purchased another $170 million worth of bitcoin, adding approximately 3,318 bitcoins to its collection, which when combined with its original 4,709 bitcoin purchase, now represents roughly 5% of the company’s cash position.
Conclusion
It appears that big tech is normalizing the use of digital currency as a way to diversify their balance, and therefore, minimize risk. We’re still very early in this adoption phase. Only time will tell if there will be a more wide-spread transition into bitcoin throughout the corporate world. However, these moves by well known names such as Tesla, Square, and Paypal certainly go a long way towards legitimizing crypto and moving forward, it will be interesting (to say the least) to see whether or not these early adopters will ultimately be rewarded by investors.
Disclosure: Nicholas Ward is long Tesla. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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