National Review
Has Tesla Hit Its Peak?
In the end, the needles that likely pricked the bubble were those used to inoculate millions of Americans starting last November. For the stock market, there was before November 9, the date of Pfizer’s vaccine announcement, and after November 9. The news that vaccines developed by Pfizer and Moderna were safe and effective fired a shot signaling that the pandemic would soon be controlled and that the economy would return to normal before long. The market rotation since then has been rapid, with former leaders stalling or losing ground and former laggards recovering rapidly. Since that November date, the FAANG (Facebook, Amazon, Apple, Netflix and Google) stocks that led the way in 2020 have averaged a return of 3.1 percent, gaining mainly thanks to Google, which was up 15.7 percent (the FAAN without Google averaged a negative 0.1 percent return). Microsoft did better, up 5.5 percent. Zoom Communications and Peloton Interactive, the 2020 icons of work at home and exercise at home, were down 34.3 percent and 12.7 percent respectively. (Returns are as of the March 22 close.) On the other side of the tracks, the old and unsexy names, which fell in March 2020 and could not sustain a decent recovery through the remainder of the year, have all soared. Since November, “ok boomer” companies Exxon and Valero are up 70.6 percent and 89.4 percent; Carnival Cruise, Delta Airlines, and Marriott International are up 98.8 percent, 52.7 percent, and 45.8 percent; Gap, Darden Restaurants, and Ulta Beauty are up 40.9 percent, 33.9 percent, and 46.5 percent. But then there was Tesla. Tesla, the maker of fortunes and dreams. Tesla, the rocket, the star, the supernova. When I last wrote on Tesla for Capital Matters back in July 2020, the stock had already risen to $300 (prices are adjusted to reflect an August 5-to-1 stock split) from a low of $72 in the March 2020 selloff. In subsequent months, it climbed first to $450 through mid November, whereupon in theory, it could, like other market leaders, have been vulnerable to the vaccine news. Instead, Tesla shrugged it off and powered ahead to $900 by the end of January of this year. During this yearlong surge, it joined the S&P 500, and Elon Musk became the richest man in the world. In mid February, the estimated wealth of the Tesla CEO was $200 billion, one layer of atmosphere higher than Jeff Bezos’s $194 billion. Tesla was trading at $37 in May 2019, and then at $900 twenty months later, a 23-fold increase, or the equivalent to a compounded average growth rate of 17 percent per month. It looked like the most rapid ascent for a company in stock-market history. The last few weeks have been different. From its $900.40 intra-day high on January 25, Tesla stock retreated to $563 by March 8, a bruising 37 percent decline in six weeks, and bounced quickly to $670 by March 22. Of course, the fall was due in large part to the Nasdaq Composite’s own 5.5 percent fall since early February. But not only. Yes, Tesla did rise during 2020 for some of the reasons that propelled the Nasdaq, but a larger share of its increase was due to its own dynamic and to the devotion of its fans, many of them small retail investors. On the last point, it has been said that although Tesla is a cutting-edge company with well-loved products, its stock behaved in early 2021 like a mega-sized GameStop, at least for a while. Will the stock make new highs, or did we see Peak Tesla in late January? If we saw Peak Tesla, people will theorize in hindsight about the specific event that coincided with the turn: Was it Elon Musk’s grilling of the Robinhood CEO (“the people demand answers”), the tweets during the GameStop madness, Tesla’s investment in Bitcoin? Or the invitation to Putin to appear jointly on Clubhouse? For a while, Musk was everything and everywhere and on everyone’s mind. And ubiquity is often the sign of a top, as we know from the tale of Joe Kennedy and the shoeshine boy. That the stock is overvalued seems beyond contention, except among fans who love the story but don’t do any analysis, as well as some highly visible pros who built their reputations on pricing in developments that will not bear fruit for years, if ever. The most prominent Tesla bull among the pros is Cathie Wood, whose team at ARK Invest last Friday set a base case 2025 price target of $3,000 (and a bearish case target of $1,500). ARK’s team believe in disruption on a massive scale in the next ten years and see Tesla as one of the greatest beneficiaries. Their research is available online. Mirroring the more extreme bull scenarios, some bearish estimates put Tesla’s fair value at somewhere between $50 and $250 per share, depending on whether you consider its cars a software product rather than an automotive product with a long-range battery. This wide divergence of views can be seen in the pricing of Tesla options. An at-the-money put or call is priced at nearly 40 percent of the stock price, a very high level that suggests poor collective confidence in today’s price. For some, it is way too high. For others, it is way too low. Meanwhile, competition is coming fast, with all the major automakers rolling out electric vehicles (EVs). It may be that none of them match Tesla’s cool factor, or that Tesla’s battery can travel farther on a single charge, but these considerations alone will not prevent the likes of Volkswagen and Ford from making significant inroads in Tesla’s market share in EVs. Competition is coming fast in software too, with Google, Apple, and others all developing automated-driving software. Meanwhile, the profit picture is unclear. Carbon credits helped the company turn a profit in 2020 (and join the S&P 500), but they are expected to fade in 2021. Much depends on the macro environment. With free money gushing out of Congress and the Fed, Tesla stock could make new highs throughout the rest of the year if long-term rates do not rise too quickly. But the selloff in stocks in the past few months was precipitated by a rise in Treasury rates. The ten-year yield climbed from 1 percent at the end of January to 1.7 percent as of March 22, essentially returning to its pre-pandemic level. The rest of the year will probably hinge on inflation expectations. Several prominent economists see inflation accelerating to at least 3 to 4 percent. In order to offer a positive real rate, ten-year yield would then have to exceed these levels. A ten-year yield of 4 percent or higher would wreak havoc on the valuations reached by the fastest-rising stocks of 2020. If the move is gradual and not excessive, we could see for the rest of the year what we saw in the past two months: a sector rotation that raises 2020 laggards much faster than it does 2020 leaders.
