Is Tesla A Bubble?-$TSLA

Looking at the chart for $TSLA its understandable why some people are calling Tesla a bubble. But is this bubble about to burst, or has it already?

In this article I am going to break down what a bubble actually is. Ill talk about the recent COVID crash & market rally. Ill go into the rallies correction and Tesla itself. Finally I’ll offer a conclusion and answer to the question is Tesla a bubble?

The article will flow, or meander, in the following way:

• What is a bubble?
• The Dot Com market crash
• The COVID rally
• Nasdaq100
• Tesla Commentary
• Conclucsion

Dot Com Market Crash

Let’s first understand what I’m referring to as a bubble for this article.

A bubble is something similar to the dot com market crash. Something beyond sustainable but more than anything a situation largely comprised with extreme euphoria resulting in exaggerated over valuation. This is sometimes surrounding something of little value that ultimately returns to its fundamentals for example, Tulips. This mania also showed itself with the new internet companies of the dot com era that went bust. It arose during the sub prime mortgage fiasco . Where the junk mortgage back securities people were packaging and selling became substantially over extended.

Item 1.1

The internet companies of the dot com era were often times little more than a website. Their income statements showed little to no revenues. Often due to entrepreneurs and their teams looking to cash in on the start up mentality surrounding a new technology, the internet. At the time it was fairly new and something still flashy and shiny. The industry wasn’t as full of computer scientists and coders as it is now. This means most didn’t understand the internet, its future and current capabilities and therefore had a tough time distinguishing what were and were not good business models and solutions. This allowed entrepreneurs and scammers to cash in with little more than a website and a business plan. Investors and traders are much more savvy now regarding technology.

Market Crashed Quickly

As you can see in item 1.1, the market crashed quickly. It then took over a decade to finally make a new high. This is much longer than the less tech heavy S&P has ever taken to recover.

Now when looking at a broader term for bubble it is often academically referred to as a situation where the price for something—an individual stock, a financial asset, or even an entire sector, market, or asset class—exceeds its fundamental value by a large margin, says Investopedia.

That’s pretty vague, whats large to me may not be to you. If however we use this definition, most things were likely a bubble including the market.  Fundamental analysis though is a contentious and imperfect science that results in wide dispersion of price targets and valuations. So I want to dig a bit deeper. Lets consider a bubble as something that when it bursts that’s it and there’s no blowing the bubble back up. In the markets case this results in an extended period before reaching new highs. For the market and most profitable companies its not a matter if but when.

Tesla Basics

Before diving into the technical & fundamentals of Tesla, lets begin with the basics.

Taken from Stockhouses website: Founded in 2003 and based in Palo Alto, California, Tesla is a vertically integrated sustainable energy company that also aims to transition the world to electric mobility by making electric vehicles. The company sells solar panels and solar roofs for energy generation plus batteries for stationary storage for residential and commercial properties including utilities. Tesla has multiple vehicles in its fleet, which include luxury and midsize sedans and crossover SUVs. The company also plans to begin selling more affordable sedans and small SUVs, a light truck, a semi truck, and a sports car. Global deliveries in 2022 were a little over 1.3 million vehicles. – Stockhouse NDAQ:TSLA | Stock Price Today, Quote & News | Tesla Inc. (stockhouse.com)

In short form Tesla is an electric vehicle manufacturer that also produces power storage and related accessories for both. They have many ways in which they bring in revenues and are generally considered a growth company.

Post Market Crash Rally

If we step back and take a look at the overall markets using the S&P 500 Index and more specifically the Nasdaq 100, you can see that post COVID 2020 until late 2021 the markets had gone on a tear.

If you look at item 2.1, you can see a slower rise and a slower fall than the dot com era. We have also not gotten to the lows of pre market rally yet like the dot come crash did.

If we look at larger sized businesses the vast majority of them had nice runs from the COVID lows. Nearly all of them had large mountain peaks and valleys. There are a few energy and health companies whose charts have held up well.

There were many reasons for these large gains in the markets and most stocks.

• Government stimulus
• Fear of putting money in any other asset class
• Post crash market rallies
• Huge increases in company earnings and cash flow
• North Americas start up and growth desires

Also people were often stuck at home unable to travel . They also had Government stimulus and a desire to spend money. This could be to kit out a home office or to buy entertainment services or order food in or buy furniture or remodel their house etc. etc.

Supply Chain Issues

The supply chain issues that arose from COVID, the continual lockdowns and difficulty finding people to work caused significant delays. This happened all while the demand was increasing from consumers, who had the money to spend. Many, including myself, would buy a product with a delivery date many months out. This was because we needed something and felt we had to buy it that moment. If we didn’t buy it that moment it could take more than a year for things to sort themselves out. This allowed companies to often raise prices or at least extend order files out substantially. This helped to fuel the margins and the returns for companies which helped to further the rally.

This put most stocks at risk of large corrections once the market rally from the above events petered out.

Nasdaq100 Historical Prices With Cumulative Average Gain/Loss

Since Tesla is on the Nasdaq100 we will focus on it. It generally has an average gain of approximatel11.6%.

If you look at image 3.1 you can see each year on the Nasdaq100 since its inception. This includes the yearly gain/loss percentage in the second right column. In the far right column is the average gain/loss percentage.

Over its history after strong rallies and extreme market gains it is followed by a crash or large correction. This helps to bring it back inline with its average gain percentage. This is denoted with the red arrows.

Subsequently it has consistently had strong up years after large bad years. This coincides with the strong rally we saw out of the COVID pandemic. This is marked with the green arrows.

Sticking The Beta

For those that aren’t technical traders they may not understand the term Beta when referring to stocks. You hear it more in options circles, but the beta Im talking about is for the stock itself.

This basically indicates how much a stock will move compared to the overall market. The market is deemed 1 and a stocks deviation from 1 suggests on average how much it will move compared to the market.

A beta less than 1 means the stock will move less than the market. A beta over 1 means it will move more than the market. A negative beta means it moves inversely to the market so when it goes up the stock goes down.

Tesla’s 5 year beta as per Yahoo Finance is 2.03.

That means if the market moves 1% Tesla should move 2.03%.

Perfect Science

This is not a perfect science or at least it wont always be exact. Sometimes a stock has news or catalyst that helps it deviate from normal beta protocol. This then moves more and/or opposite of what the market does.

Item 4.1

• Tesla’s price at the bottom of covid was $23.37 its peak was $414.50 and is currently $117.67
• That’s 17.74x from its low to its high!
• A drop of 71.61% from peak to current market price.
• The Nasdaq100 lowest was 6771.91 its peak from the coinciding rally was 16764.86 and is currently at 11145
• That’s 2.48x from its low to its high
• A drop of 33.50% from its peak to its current price.
• KARS – Krane Shares Electric Vehicle & Future Mobility is an ETF focused on electric cars and future methods of transportation.
• $15.39 was its post covid low with $55.85 being its post covid peak and a current price of $29.75.
• That’s 3.63x from its low to its high.
• A drop of 53.3% from its peak to its current price.

Unsustainable Rise

As we can see in the rally Tesla went much more than 2 times the market. It also well outpaced the KARS. The up rally from COVID represents around 20% of the total time the beta is calculated from. In other words this rally where it went 17x is one part of five of the beta calculation. During this period the beta was around 7.

There’s a lot of reasons for such a disparity. During the rally some sectors and companies were experiencing an unsustainable rise. This made it look like a bubble. Especially unprofitable companies in forward looking sectors tied closely to new technologies and areas that are expected to grow. Also it’s a fan favorite and a near meme stock in its sentiment. When retail traders and investors received stimulus money or decided to play the market during the lockdowns, Tesla was a favorite play. This all helped to increase the magnitude of the rise.

Also a lot of quants and algorithm players signals were going off saying to buy buy buy. Many traders and investors like high ATR(average true range). Tesla has action and nice range also making it a favorite. It was easy trading and investing as most stocks would just go up. This pushed many well beyond fundamental fair prices into the land of way too expensive and extremely overvalued.

Calculating The Value

But the thing with fundamental valuations is there are many different ways to calculate the value. When you look at intrinsic earnings valuations it was often well beyond the current price. If you used historical stock price gain/loss formulas, the prediction was often well beyond the current price. That means in the academically defined bubble in some fundamental valuations it wasn’t largely overvalued. In some cases it was actually still undervalued. Fundamentally in Kepteasy’s analysis its overvalued. However on itrinsic earnings we show the price much higher. Looking at historical stock prices the price target is also much higher.

The sell off on the other hand has been a bit more organized and steady. Where fundamentals were brought back into the scope as something that mattered to investors. They feared an overvalued market and a Federal reserve interested in taming inflation.

Also it was easy to see coming unlike the pandemic or a flash crash. A significant portion of investors and traders were well aware the market was quite overvalued. They were busy building short positions while the market was nearing the peak. Traders and quants are quick to adjust when capitulation occurs.

Bubbles Burst Violently

Oftentimes when bubbles burst they do so violently. This market instead went through a normal distribution phase as per Wyckoffs methods. It then entered a mark down period which we may still be in. These are more normal market conditions. It hasn’t acted like a major bubble burst and instead a calculated sell off and sector cycling.

This has been a less euphoric market crash. Theres a lot of steady sell offs on stocks. There has been little market fear as per the $VIX. There have also been sectors in which earnings, cash flow and demand were still strong.

When looking at the downturn and bear market, Tesla has performed much more aligned to its Beta. It slid 2.14 just fractionally more than the 2.03 beta.

That alone is almost enough for me to claim its not a bubble but lets look at this even more.

Tesla Is The Clear Market Leader In EV

What is Tesla? It’s an electric vehicle producer with power storage options.

They have a ton of cash on hand. As per Yahoo Finance they were sitting on $21.17 Billion in cash and cash equivalents as of 9/3/2022.

Tesla are net income positive. On a TTM (Trailing Twelve Month) basis they are +$12.371 Billion Net Income, an easily profitable company.

They are at the forefront of a future growing demand. Global EV penetration is expected to rise to 40% by 2030 and the number of EVs will reach 26 million units by 2026, Delta Electronics founder Bruce Cheng said.

Governments globally are pushing their economies towards non combustion engine transportation.

They’ve been around for awhile now since 2003.

They were not some post covid crash startup looking to cash in on a work from home scheme.

Besides BYD in China, Tesla is the clear leader in EV vehicles for the consumer. It also isn’t as restricted to a specific jurisdiction as Chinese companies are.

Tesla are nowhere near the maximum consumption level possible. TSLA is also nowhere near the peak sales level they will see in the future. As per Statista, revenue for Tesla is projected to reach US$20.69bn in 2023. Revenue is expected to show an annual growth rate (CAGR 2023-2027) of 4.27%, resulting in a projected market volume of US$24.46bn by 2027. Tesla unit sales are expected to reach 378.9K vehicles in 2027

They are also a pure play on EVs, they are not a gas car trying to be an EV.

They have a strong fan base and loyal supporters, myself included. I own and drive a Tesla Model 3. I can assure you while I can give you a few complaints, it is far superior to combustion vehicles.

Nowhere Near Its Future Peak Of Sales

This company is in one of the two largest sectors of the economy, vehicle sales. They are nowhere near their future peak sales potential.

This is not a new or unknown technology. This is a well understood solution that is at the forefront of the future.

There were a lot of near worthless companies in the dot com crash. Theyd cash in on the startup frenzy, further fueling the rally. In such a market rush the diligence of funders and investors goes down. It then becomes a ride it until the wheels fall off mentality.

Tesla on the other hand is helping to change the world. They are growing with a large amount of sales. Growing with a large runway to more demand and more sales i.e. more revenue.

They are now profitable. They no longer absolutely need to dilute themselves or seek debt laden funding, for the most part.

This is all non bubble intel suggesting a market leading company in a strong sector. They have tangible results and solid numbers on the balance sheet and income statement.

Electrification of economies is far too important to the climate plans. Most countries are in on progressing towards a cleaner planet. Tesla is positioned at the top for market penetration globally for anyone serious about electric vehicles.

This makes them too important for Governments even though there are so many competitors in the space.

Stock Price Off A Ton

Yes the stock price has come off what seems like a ton. The chart is nearly jaw dropping in its wild rise and fall. But when considering the information I’ve mentioned above, it actually has held up fairly well. Its sell off is in line with its beta.

This information didn’t even include the CEO causing a lot of chaos. This rattled investors. Then a firesale of the stock to handle extraneous business affairs not tied to Tesla happened. Even with the firesale the stock has barely sold off more than its beta. This is a testament to how strong the brand and company has been. All further indication it isn’t a bubble.

In general its going to move 2x the market. During the bull run post COVID it did approximately 7x representing a 7 beta over that period. Even with this momentous rise it has only come off at the normal beta rate of 2x. Thats its normal beta over the past 5 years.

This means that in context of the Nasdaq100 components it has held up admirably considering how much it went up. Bubbles tend to burst and when they do the correction is gargantuan, sometimes all of its gains. Tesla is still well away from its COVID lows. Therefore it has held up according to its beta, which means normal market moves.

Justified Moves Lower

If the market is making justified moves lower due to economic and macro factors it cant be considered a bursting bubble. Everything that goes down with it is often just along for the ride.

The exchange has shown that after a run of better than average gains it will correct for usually a year. This correction will be with larger than normal decreases. Occasionally it will decline for two years in a row.

If you refer again to item 3.1 above you can see the red arrows. These are where the market corrects back to a mean.

This is what we have experienced, a reversion to the mean.

At this point its normal market action as far as I can tell. Tesla is showing how high the sentiment is and the future importance of the company. It went far beyond a normal beta on the way up and nearly an exact beta on the way down. Tesla is holding up much better than something that has burst would have.

No Market Burst

The markets themselves haven’t even burst, they’ve simply been steady sell offs. A lot of the bursting that happened was on unprofitable tech companies. This was near the end of 2021 and early 2022 when they totally imploded.

But most of the large companies simply sold off. Many of them just have higher beta so the move is larger. When they sell off and revert to the mean they move a lot more then other companies and the markets in general.

This large mountain like peak and valley can turn the stomach of anyone tuning into the chart.

But when you look at the price changes in terms of percentages, you can see that looks can be deceiving. The COVID correction is only visually bigger than the 2008 crash. On the chart it doesn’t seem so bad. Take the percentages and 2008 is worse than the COVID correction.

Humans are often very visual. The chart does look quite bad and that helps to create that idea we experienced a bubble. When you dive into the numbers and do a bit more investigating and analyzing you can see a different picture. While the market and Tesla were a bit overvalued and beyond fundamental valuations, in general its not unlike markets we’ve seen before.

When companies earnings, guidance and cash flows are going up and coming in strong, many financial models are going to create valuations that are higher. Knowing that the market is likely to come down due to unsustainable economics and macro events does not mean its overvalued fundamentally by some formulas and analysis.

Answering The Question: Is Tesla A Bubble?

In conclusion I wouldn’t say Tesla is a bubble. The information and numbers just don’t add up to it being one. Yes there’s strong sentiment. Yes it is above a fundamentally fair valuation. Yet so is Apple which is the biggest company in the World and has a strong brand, similar to Tesla. Strong branded companies at the forefront of change and the future will always command a higher valuation. This valuation will always be beyond what its fundamentals suggest it is worth. This is the pricing in factor of the sentiment and brand strength.

What if Tesla comes down more near its post covid lows, without it being in a market or flash crash? What if it then drags on unable to regain traction and growth never seeing its post covid highs again,? Maybe then I will say it was a bubble but no sooner.

For now its steady as she goes. If you are a Tesla fan or investor that is, regardless what tweets you dislike of its CEO.

You should be quite happy how it has held up and how strong the brand is. It has a bright future. It could be the next market leader & Worlds biggest company one day soon.

Justin Mayer

Kepteasy – Trading, Investing, Solutions

Justin Mayer is a trader/investor/solopreneur. He is the founder of Kepteasy Inc. He created the “Mayer’s Performance Score” a scoring system based on various inputs that helps determine which companies will provide a better return. He is a former golf professional/professional golfer, sales manager, music producer/artist, marketer, & designer. He has been investing for two years and day & swing trading for 1 year 10 months. He has become a solid chartist and technical analyst. He has built multiple consistently profitable trading systems in that time and is currently in the midst of a 92 day winning streak with intraday trading. He learned Python programming to help him improve his trading & investing. So far he has built a trading analysis and dashboard, a fundamental analysis using algorithms and scoring systems, a Journal code, a daily charting code and more. He is a value dividend investor with a solid track record of capital gains and nice dividend yields. He is also a terrible growth investor, suffering a large drawdown on his Acuity Ads & CloudMD investment along with ten penny stocks he bought at the peak of euphoria. Justin & Kepteasy are trading with a smaller account so the actual returns are not as good as the stats. He is managing risk as he works on growing the account and upping his all around stock game.

Disclaimer: The author of the article owns zero Tesla stock. The author owns a Tesla Model 3. He occasionally trades Tesla using the $TSLL. The author is the founder of Kepteasy Inc, a bootstrapped fintech startup, which owns zero shares of Tesla or TSLL or any instrument tied to Tesla. Kepteasy and the Author are not paid or sponsored to endorse Tesla or any other company, site or product. Any of those mentioned herein are for information purposes to help enhance the content and experience.