Tesla results next week may put skids on shares fuelled by Fomo

As the gravity-defying surge by global equity markets has been playing out in recent months, technology shares have stood out. The likes of Apple, Microsoft and Amazon have each reached record highs in the last few weeks as investors bet on their ability to thrive in the world of coronavirus.

None, however, has had the run enjoyed by Elon Musk’s Tesla, the electric carmaker that’s being valued of late more like a tech stock.

Beloved by day traders and the bane of short sellers (billions have been lost by hedge funds in recent years betting against the stock), Tesla overtook Toyota earlier this month to become the world's most valuable carmaker.

Vanguard

While the Japanese group sold 30 times more vehicles last year and made 10 times as much revenue, Tesla is seen by its fans as the future – in the vanguard of the green and technological revolutions facing the industry. (Musk claimed this month that the company was “very close” to delivering fully-autonomous vehicles, meaning they would require no human input by a driver.)

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While Tesla shares slid with the wider market in March as coronavirus stunned western economies, they have since soared more than 300 per cent – even taking account of a pause for breath this week. They have rallied over 700 per cent from a low point last year.

The company hit a peak market value of more than $330 billion (€289 billion) earlier this month, fuelled in part by an army of novice investors – otherwise stuck at home during lockdown and in the absence of sports gambling – that have joined online brokerages like Robinhood, based in Silicon Valley, in troves.

It’s all a far cry from when Musk told employees in May last year the then lossmaking company was burning through cash so quickly it would run out of the stuff within 10 months without deep cost cuts.

Profit

However, the group reported in January that it had posted a first annual profit in its decade as a public company as it shifted more cars, even if the sales focus had been on its cheaper, but more accessible, Model 3 sedan (currently retailing in Ireland between €48,900 and €64,490) compared to the S and X models (which start off at €85,000 and €100,000, respectively).

On July 2nd, the company surprised analysts by reporting that it delivered 90,650 vehicles in the second quarter, 25 per cent more than consensus expectations.

But even Musk, who sold his first software company in 1999 for $300 million (€262 million) before going on to co-found PayPal, has been sceptical about the current Tesla hype. Shares in the company wobbled briefly in early May when Musk tweeted that he thought the stock price was too high.

The colourful South African native, who is said to have read the entire Encyclopaedia Britannica at the age of nine and learned to code within days of getting his hands on his first computer a year later, offered just one word – "Wow" – to his almost 37 million followers on Twitter this week when investment bank Piper Sandler issued a bullish note suggested the company was worth almost $430 billion (€376 million).

Cautious

Should investors be reversing out of this one?

“Resoundingly, we think the answer is NO,” wrote Piper Sandler analyst Alexander Potter in his report. “Tesla is the most consequential company in the mobility ecosystem, and this is unlikely to change in the next decade.” Whatever that means.

Others, such as Frants Preis, a fund manager with Vega Asset Management in Musk's native Pretoria, are decidedly more cautious.

“Tesla looks dangerously and unsustainably overpriced, with a valuation that is divorced from its fundamentals,” Preis wrote this week.

“Tesla’s value is based on its potential to earn massive profits and sustain stellar growth in future. It currently sells about 400,000 cars per annum and will have to grow annual vehicle deliveries to at least three to four million over the next decade to justify its current valuation.”

Elsewhere, financial news service Marketwatch cited Robert Bacarella, a portfolio manager with Monetta Financial Services in the US, as saying: "The stock is not trading on a multiple of today's or tomorrow's earnings. It is trading on a multiple of Elon Musk's dreams."

FOMO

The surge in Tesla shares may have been fuelled by one of the most primal of market forces – the fear of missing out (FOMO). But the group is now valued at a level where even the most passive of investors may be forced to get on board.

If Tesla reports a fourth straight quarter of profit next Wednesday it will clear a final hurdle standing in the way of joining Wall Street’s S&P 500 – the world’s most important stocks index to investors who don’t pick and choose individual shares but buy into a basket of companies in a benchmark.

Inclusion in the S&P 500 has already been priced in as a forgone conclusion by the market, according to observers. Things could turn ugly if Tesla’s results disappoint. Time to buckle up?