In this article, we delve into market volatility, valuation, revenues, and risks of Tesla stock
Trading Strategies
February 9, 2024
Determining a stock's volatility is paramount for investors seeking to make informed decisions in the financial markets. Volatility measures the degree of fluctuation in a stock's price over time, reflecting the market's perception of risk associated with that particular asset. Understanding volatility aids investors in assessing the potential returns and risks of a stock investment. High volatility implies greater price swings, offering opportunities for significant gains but also posing increased risks of losses. Conversely, low volatility suggests more stable price movements, suitable for conservative investors seeking steady returns.
Volatility (beta) plays a crucial role in portfolio management, as it helps in diversification strategies and risk management. By incorporating volatility analysis into an investment approach, investors can adjust portfolio allocations accordingly, aligning with their risk tolerance and investment objectives. Ultimately, by comprehending a stock's volatility, investors can make more informed decisions, optimize portfolio performance, and navigate the complexities of the financial markets with greater confidence.
Understanding stock market volatility involves grasping the rate at which a stock's price fluctuates over a specific period. This volatility, often indicating higher risk, aids investors in estimating potential future fluctuations.
Volatility (beta) is calculated through standard deviation from average price movements. It illustrates the range within which a stock's price may rise or fall. Various factors contribute to volatility, including political, economic, industry-specific, and company performance elements.
The volatility of Tesla (NASDAQ: TSLA) shares stems from various factors, notably its recent 2023 Q3 earnings report showing a significant decline, leading to a 16% drop in stock value. This has raised concerns about the sustainability of its market valuation. Over the past months, TSLA stock has been selling off intensely.
The delivery of more Cybertrucks, a highly anticipated product, could potentially be a lifeline for Tesla, especially in penetrating the profitable pickup truck market. Market analysts foresee increased volatility surrounding Tesla's stock as the Cybertrucks roll off the production line in unknown speeds, with optimists expecting a boost and pessimists anticipating potential delays or manufacturing challenges.
Despite short-term uncertainties, Tesla's long-term prospects remain promising, with its aggressive pricing strategy and diversification efforts in energy storage and charging infrastructure indicating potential growth opportunities.
ETFs are capitalizing on Tesla's share volatility. Traders considering investment in Direxion's TSLA Bull and Bear ETFs should be cautious, as these instruments are designed for short-term trades and carry inherent risks, particularly given the heightened volatility surrounding Tesla.
Investing in Tesla stock entails substantial risks stemming from various factors. Firstly, Tesla's cars remain relatively expensive, even with government incentives, potentially limiting their market reach and profitability. Additionally, the company faces challenges related to battery production, with its Gigafactory construction facing uncertainties that could affect its ability to meet demand.
Low gas prices pose a threat to Tesla's competitiveness against traditional vehicles, while increasing competition from other electric car manufacturers could erode its market share. Tesla's substantial capital expenditures may not yield commensurate returns, and its reliance on CEO Elon Musk, known for his controversial behavior and multiple lawsuits, adds another layer of uncertainty.
Overspending is a big concern among Tesla critics. Elon Musk is known for pushing the bounds of what is possible and driving futuristic outcomes. Instead of maximizing returns from existing, successful vehicle product lines, Musk continues pushing R&D to next levels in pursuit of self-driving vehicles, cybertrucks, semi-trucks, ATVs, and even robots. All of these pursuits significantly increase capital expenditures, which divert profits away from shareholders. And while the promis of these technologies increases the market valuation of Tesla as it is valued as a technology company instead of a car manufacturer, that lofty valuation (44 times earnings vs 5 for GM), comes at a high risk. If one or more of the new product lines fails to work or be adopted heavily by consumers, the valuation is likely to pop.
Investors view each product launch, setback, and success announced by Tesla and react to it. This causes huge swings in the stock price as sentiment shifts back and forth from bearish to bullish.
Despite Tesla's significant valuation and achievements, these risks underscore the volatility inherent in investing in the Tesla stock.
Tesla stock recently saw a significant drop of 12%, resulting in an $80 billion loss in market value, following a bleak earnings call where the company warned of slowing electric car sales growth and highlighted the threat posed by Chinese competitors.
Despite a notable 38% increase in deliveries last year compared to 2022, Tesla indicated that its sales growth this year might fall notably short of previous expectations, attributing this to ongoing development efforts for a new, likely more affordable vehicle.
Financial results for the last quarter were disappointing, with adjusted earnings per share down 40% from the previous year and revenue failing to meet market forecasts, marking the second consecutive quarter of missing analyst expectations.
The company's operating margin also took a hit, partly due to increased costs related to the production of the Cybertruck pickup.
Tesla has been continuously reducing prices over the past year to stimulate sales amidst heightened competition from Chinese automakers, such as BYD, which outsold Tesla in the last quarter of the previous year for the first time.
Elon Musk acknowledged the formidable competition posed by Chinese carmakers and emphasized their potential to dominate the global market if trade barriers are not established.
Despite the recent setbacks, some analysts remain hopeful, anticipating that the launch of Tesla's lower-cost vehicle in the coming years and potential shifts in the economic environment could serve as positive catalysts for the stock's recovery.
Investing in Tesla stock offers enticing advantages such as its significant role in revolutionizing the automotive industry with electric vehicles and clean energy solutions, remarkable growth potential, disruptive market influence, and strong leadership epitomized by Elon Musk. However, these advantages are counterbalanced by notable disadvantages.
Tesla stock is prone to high price volatility and possesses a high beta, indicating substantial market risk. Additionally, being a cyclical stock tied to economic fluctuations, facing production uncertainties, fierce competition from both established and emerging electric vehicle manufacturers, and profitability issues stemming from various factors including supply chain disruptions and fuel prices, underscore the inherent risks associated with investing in Tesla.
The valuation of Tesla Inc prompts a crucial inquiry: is the stock overvalued or undervalued? Despite recent losses in stock value, with a daily decline of 7.91% and a 6-month loss of 20%, Tesla's GAAP Earnings Per Share (EPS) came in at $2.27, suggesting potential hypervaluation on a Price to Earnings basis. Analysis indicates that at its current price sits at 44 times annual earnings. This valuation exceeds that of Apple, Microsoft, and MasterCard.
P/E ratios are helpful for measuring profitability but not for accounting for current or future growth. Over the past year, Tesla's revenue has been relatively flat on a year over year basis. Compare this to Microsoft, whose revenues have increased 20% over the same time period.
Earnings growth is another way to identify valuation. While Microsoft's earnings have increased 34% quarter over quarter, Tesla's GAAP earnings have increased 112% over the same period. From this perspective, Tesla is growing earnings a 3 times the rate of Microsoft - a rate that supports a higher valuation multiple.
Lookig at the price performance of Tesla stock over the past 6 years, we can see the volatility. But we also see a total gain of 814% over that time period. How does that compare to Microsoft? Over the same period of time, Microsoft gained about 380%. Using historical returns, Tesla looks fairly valued.
On a year to year basis, the difference in the volatility is obvious, however, as are the risks. Getting a good entry price is critical unless investors have a 10-year time horizon for holding the stock.
Total addressable market is another factor in understanding valuation. This refers to the total possible revenue from a company's product line. In the case of Tesla's TAM, we need to analyze the TAM by product category:
Electric cars: The Total Addressable Market for Electric Vehicles is projected to grow to $1.5 Trillion by the year 2023. Currently, the TAM is $400 Billion of which Tesla commands 20% market share. Assuming they maintain this market share (which is looking less likely due to increasing competition), Tesla revenue in 2030 would be $300 Billion. That would mean a growth rate of almost 4X over the next 6 years. Using these figures, it becomes much clearer why Tesla stock bulls are so bullish.
If we assume Tesla can only command a 10% market share by 2030, revenues would come in at $150 billion, which still represents 90% growth over the next 6 years.
Tesla's ambitions do not stop at vehicle production. It plans to sell its autonomous driving software to other vehicle makers. Just from licensing the software as an upsell to Tesla drivers, Tesla is making $1-3 billion in annual revenue. A recent analysis by Goldman Sachs analysts estimated the potential value of this software to be $10-75 billion in revenue per year in addition to the vehicle sales.
At a price to sales ratio of 5, adding $10 billion in revenue equates to increasing the company's valuation (market cap) by $50 billion (an 8% increase above today's market cap of $600B).
Tesla recently showcased its second-generation robot, Optimus, which is capable of moving on its own and carrying objects around. The potential uses of these robots, if produced at scale and cheap enough, are enormous. Use cases range from carrying groceries for older people to delivering boxes for UPS to supporting military operations. While they are several years away from producing anything worth buying, the total addressable market for humanoid robots has been estimated to be $1 Trillion dollars. It's easy to imagine the U.S. Defense Department ordering $40B worth, which would be less than 5% of its current annual budget.
A market size that large, with orders that big would 5X the valuation of Tesla quickly - assuming the company wouldn't spin the division off into its own company. Naturally, the risks are high. The robots might never be good enough for people to want them. Or, Tesla might not be able to produce them cheaply enough for mass appeal. Or, they could go awry and start attacking humans as we've seen in so many Hollywood films. The point being here, we can't assume this vision will ever happen, although Musk has a pretty incredible track record of overseeing the improbable dreams come true.
It may be the biggest risk of all is something happening to Musk himself.
On a more tangible topic, Tesla's network of high-powered electric charging stations is also worth a mint. Tesla owns and operates over 50,000 supercharger stations and recently inked deals with major car companies, GM, Rivian, Mercedes, and Ford, to allow them to use its vast network for their own EVs. Analysts estimate that by 2030, Tesla will be able to derive $10-20 billion per year in revenues from these charging stations.
Investors are drawn to Tesla stock for several reasons, with its innovative technology and forward-looking approach being key attractions. Tesla is set to attract the most individual investor dollars in 2023, surpassing even the SPDR S&P 500 ETF Trust.
Christopher Schwarz, a finance professor, attributes Tesla's appeal to its rebound in 2023, particularly in the context of disruptive technology stocks. Despite concerns raised by analysts regarding potential challenges ahead, retail traders remain enthusiastic about Tesla's long-term prospects, driven by their emotional attachment to the brand and its visionary leader, Elon Musk.
While some experts caution against individual investors' heavy reliance on single stocks, the allure of Tesla's story and its potential for substantial returns continues to captivate retail traders and professional investors like Kathie Wood, reflecting a broader trend of increased retail trading activity observed in recent years.
When a stock is volatile, its price experiences significant fluctuations, with highs and lows occurring frequently or erratically. This volatility, a key consideration for investors when selecting securities, indicates the level of risk associated with a potential trade.
Various metrics measure volatility, with standard deviation being the most popular. Standard deviation reflects the degree to which a stock's price deviates from its mean over a period, often analyzed using Bollinger Bands. Additionally, measures like maximum drawdown and beta provide insights into volatility relative to the broader market.
High volatility stocks offer opportunities for quick gains but come with increased risk, while low volatility stocks typically provide steadier, long-term growth. For options traders, Tesla is both a blessing and a nightmare. On good days, the options returns can exceed 100%, making them highly attractive for day traders.
Those embracing AI stock options platforms like LevelFields can use advanced analytics and forecasting tools to gauge the direction of Tesla stock around key announcements and make stock options bets using the AI-provided analytics. Such bets can result in huge returns, or losses, depending on how the events play out. But it's important to remember that there are 6,299 stocks in addition to Tesla, so using AI tools like LevelFields to monitor these stocks and help identify great investments as well as options trades can mitigate against concentrated risk in Tesla stock alone.
Understanding stock market volatility is crucial for investors seeking to gauge the risk associated with their investments. While high volatility in stocks typically indicates higher risk, it's not always a negative attribute. Stock market volatility measures the fluctuation in a stock's value over time, with various metrics like beta, implied volatility, and standard deviation employed to quantify it.
Factors driving stock volatility range from investor sentiments to macroeconomic trends. Surprisingly, traditionally stable sectors like utilities, healthcare, consumer staples, consumer discretionary, and information technology have exhibited increased volatility recently, influenced by factors such as interest rate fluctuations, regulatory changes, and market dynamics. For instance, companies like Fluence Energy, Moderna, Coty, Norwegian Cruise Line, and Nvidia exemplify sectors experiencing varying levels of volatility, with potential for both positive and negative outcomes. Investors, depending on their risk tolerance and investment goals, may opt for less volatile stocks or embrace the potential rewards of high volatility through strategies like buy-and-hold and diversification. Managing position sizes is also recommended to mitigate risk in highly volatile stocks.
To capitalize on volatility in the financial markets, traders can enhance their potential for profits by embracing higher risk alongside greater opportunity. Implementing risk control measures like stop losses or using covered calls becomes crucial in volatile conditions, where swift price swings can lead to substantial gains or losses in a short period. Strategies focusing on shorter trading time frames are particularly effective during market volatility, allowing traders to exploit rapid price movements.
By identifying trending stocks, monitoring material events for event-driven trading, and adopting shorter-term trading strategies, traders can optimize their chances of profiting amidst heightened market turbulence. However, it's essential to remain vigilant and adapt tactics swiftly as market conditions evolve, recognizing that increased volatility necessitates a disciplined approach and risk management to navigate successfully.
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