Tesla (NASDAQ: TSLA) is now down roughly 60% from its all-time high of $968 just last month. It’s looking increasingly likely that the Tesla stock bubble will mark the peak of the 2010s bull market.
Much like Intel and Cisco, Tesla has a solid business with long-term growth potential. But Like Cisco and Intel, Tesla’s valuation was beyond absurd.
If you were one of the buyers that has gotten burned by Tesla or bitcoin or cannabis or any of the other market bubbles in the past few years, it’s ok. Even Warren Buffett makes mistakes. But the important thing is that you learn from your mistakes.
Unfortunately, I have read some comments from TSLA stock owners blaming the coronavirus for the stock’s downfall. They say Tesla was just “unlucky,” but there was a lot more than luck involved with the Tesla sell-off. If you chalk these losses up to pure bad luck, you will likely make the same mistakes in the future.
Understanding Cyclical Markets
If Tesla investors learn one thing from the crash in Tesla stock price it should be that financial markets are cyclical in nature. Unfortunately, anyone who started investing in the past 11 years has only ever experienced a bull market.
In a bull market, investors are hungry for risk. They are hungry for growth. In the most recent bull market, they didn’t care about profits. They didn’t care about valuation. And with interest rates essentially at 0%, they certainly didn’t care about debt.
That atmosphere created the perfect storm for Tesla. Tesla logged impressive growth numbers at the cost of heavy losses. It turned to the debt markets to fund its expansion over and over and over again, even as recently as last month. The stock climbed higher and higher and higher, even when its valuation became ridiculous compared to both its auto industry peers and its big-tech peers.
In a bear market, investors want safety. They want reliability, dependability and predictability. In an economic downturn, lending markets tend to tighten.
The past 11 years have been the easiest time in U.S. history to grow a business. Companies like Tesla have gotten unlimited access to capital and a free pass from growth investors. But the last month is evidence that the market’s mentality toward Tesla may have finally shifted.
I get why it may seem like the COVID-19 outbreak was unlucky for Tesla. Nobody saw it coming. But the thing is nobody ever sees the next crisis coming. Nobody saw the housing crisis coming. Cisco and Intel investors didn’t see the bursting of the dot com bubble coming.
It could be the housing market, a viral outbreak, an oil crisis or World War III, but there will always be another trigger for the next market downturn. It’s not bad luck. It is inevitable. The only thing investors don’t know is when it will come and how bad it will get.
TSLA stock has not been unlucky. It is a textbook example of the type of stock that underperforms during a bear market. Tesla isn’t consistently profitable. It has reported positive earnings per share in four of the past eight quarters. It will likely be unprofitable once again in the first quarter of 2020.
Tesla has an extremely high debt load. It has about $13 billion in debt and less than $7 billion in cash on hand. And even after the huge sell-off, TSLA stock is trading at earnings and sales multiples 10 times higher than Ford (NYSE: F) and General Motors (NYSE: GM).
How to Play TSLA Stock
If Tesla got unlucky, every other stock in the market also got unlucky. Yet there’s a reason why TSLA stock is down 46% in the past month while high-quality stocks like Walmart (NYSE: WMT), Procter & Gamble (NYSE: PG) and Johnson & Johnson (NYSE: JNJ) are down less than 10% in that time.
TSLA stock is a high-risk, high-reward speculative stock. Until it proves a consistently profitable business model and demonstrates it is self-sustaining, it will remain a speculative play.
Like Cisco and Intel were back in 2000, I think the future is bright for Tesla. But investors have to be smart about how they play the stock. Cisco’s dot com peak was $80.06. Twenty years later, it’s trading at $35.50. Intel’s dot com peak was $74.88. Twenty years later, it’s trading at $50.
I have and still do recommend investors just look for opportunities elsewhere. The last six months alone is enough evidence that Tesla is more of a trading vehicle for day traders, cult followers and short-sellers than a reasonable investment. You can admire Tesla’s progress and its CEO Elon Musk from a distance without putting any of your hard-earned money into one of Wall Street’s biggest casino stocks.
As long as the bear market continues, TSLA stock will likely continue to underperform. Tesla investors should think about whether they are content to continue to see themselves as unlucky or whether they want to learn from their mistakes and take action.
Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. Mr. Duggan is the author of the book “Beating Wall Street With Common Sense,” which focuses on investing psychology and practical strategies to outperform the stock market. As of this writing, Wayne Duggan does not hold a position in any of the aforementioned securities.