Not Even Tesla Stock Can Ignore Gravity Forever

It’s the most obvious statement in the markets right now: it’s good to be a Tesla (NASDAQ:TSLA) shareholder. To be sure, the company was really the first to make alternative fuel vehicles palatable to the buying public. As much as I respect Toyota (NYSE:TM), the organization almost has a mental illness when it comes to car design. In contrast, its electric counterpart gave the customer exactly what they wanted, which explains the huge rise in Tesla stock.

A black Tesla (TSLA) Model S is parked between rows of charging stations.
Source: Grisha Bruev /

But it’s not just business smarts that got TSLA its meteoric valuation. Though the novel coronavirus pandemic has been a terrible event overall, it did fortuitously market some of the core attributes of the EV platform. Primarily, EVs have fewer moving parts than internal combustion engine cars, thereby making them simpler to manufacture. Certainly, when the pandemic disrupted the global automotive supply chain, Tesla was better insulated than the competition.

Of course, this translates to the consumer experience as well. Drivers that made the switch to EVs no longer have to deal with oil changes. Because of the fewer moving parts, they’re inherently more reliable, all other things being equal. Plus, end-users can charge their EVs at home. Just over a relatively quick timeframe, EV drivers can expect to save a conspicuous amount of money. Naturally, this is a huge benefit to TSLA stock.

Yet in spite of the many successes, Tesla CEO Elon Musk is apparently worried. According to a CNBC report, Musk “sent an e-mail to employees on Tuesday warning them that they need to control their spending in order to continue squeaking out quarterly profits.”

Specifically, he warned that “investors are giving us a lot of credit for future profitability but if, at any point, they conclude that’s not going to happen, our stock will immediately get crushed like a souffle under a sledgehammer!”

Is it time to get concerned about the sharp lift in Tesla stock? Or is this another one of Musk’s eccentric antics, right before TSLA shoots to another impossibly high plateau?

A Possible Bubble in Tesla Stock

Electric car makers are in a stock market bubble. That’s according to Bloomberg contributor Chris Bryant, who recognizes the potential of EV mainstream integration. However, he’s concerned that investor sentiment might be getting overly exuberant. Bryant wrote:

The electric revolution is real and the shift away from combustion engines is accelerating. From a climate perspective, it’s great that investors are allocating capital like this. Still, valuations look mighty bubbly. The potential for disappointment is massive, particularly for the newest crop of EV makers that are yet to generate meaningful revenue.

Like all financial bubbles, this one is driven by dreams of enormous wealth. Elon Musk has overtaken Bill Gates as the world’s second-richest person. Scottish investment manager Baillie Gifford & Co., an early Musk backer, recently cashed out billions of dollars in Tesla stock but retains a 3.7% holding worth about $20 billion.

Ultimately, one of the most important cautionary takeaways that Bryant provides is that not all EV makers will be at the finish line. Frankly, that’s good advice. But I don’t think that this warning should apply to just the EV upstarts.

No, I’m not suggesting that you short Tesla stock. Clearly, the underlying company has established a dominant brand in the EV space that will be difficult to unseat, much like Apple (NASDAQ:AAPL) and smartphones. However, there’s a possibility that TSLA is reaching a peak at the current technological threshold.

No matter how great EVs are, with present battery technology, they represent a compromise. For people who drive in the city or who make frequent stops around town, EVs are awesome because of attributes such as regenerative braking.

But for longer trips, such as the highway driving that men prefer, EVs (again with current battery technology) fall short to their combustion counterparts on the convenience scale. Basically, EVs are always on so constant use without the benefit of regenerative activities is a drag on their total capacity. However, with combustion cars, they run more efficiently in highway conditions.

It’s a science problem that will turn off at least some people from making the transition. And that could make investors question the premium on Tesla stock, especially if the company doesn’t deliver the earnings goods, as Musk alluded to.

Can Covid-19 Boomerang Back and Hit TSLA?

Earlier, I stated that the novel coronavirus offered a counterintuitive catalyst for Tesla stock. While traditional automakers were dependent on the global auto supply chain, Tesla’s platform required fewer parts. This equated to greater insulation from the pandemic’s impact.

But if battery technology doesn’t improve quickly, the Covid-19 outbreak can also turn into a headwind for Tesla stock. That’s because an increasing number of people have reconsidered life in major metropolises and have headed toward the suburbs or more rural areas. Thus, such a transition translates into longer driving distances (i.e. highways), which doesn’t suit EVs particularly well.

Finally, let’s just end on the obvious impact: Black Friday and Cyber Monday sales disappointed this year, which isn’t surprising. But that also means the crazy valuation that we’ve seen not just in Tesla stock but in many other names and sectors is suspect. The economy may not be as great as the equities market suggests that it is.

Therefore, the best solution might be to wait this one out. Again, I’m not saying that Tesla will fail. But even giants need a breather every now and then.

On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.

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