The S&P 500 event for Tesla (NASDAQ:TSLA) is causing a lot of anxiety for investors. In reality it won’t change anything about the business. Any price gyrations are ping-action that won’t change the trajectory it was already on. Tesla stock is up 650% this year, so it’s done well. For years the team has crossed many milestones and this week they do it again. Only this time it has nothing to do with delivery counts or sales levels.
Tesla joining the S&P 500 Friday is making investors nervous for the whole market. Friday is also quadruple witching day when many contracts expire simultaneously.
A lot of money changes buckets and Tesla has a huge $600 billion market cap. Even though CEO Elon Musk controls 20%, the uncertainty it adds could muck up the process. It’s not the proverbial drop in the bucket for the S&P to simply assimilate.
Will this be a game changer for the Tesla stock price? I doubt it. The company has extremely convicted fans. Their resolve is undeniable so they are not likely to shake out if there is turbulence. Those who love it will continue to do so.
Then there is the cohort that chased it on the S&P inclusion headline. First they bought it up fiercely on the rumor, then on the official headline. It would not surprise me to see another celebration of it one more time. It actually happened already this week albeit closed red after the Tuesday morning jubilation.
Tesla Stock Is Not Cheap. So What?
It has a four digit price-to-earnings ratio and that scares people, but that’s not very important. There are experts who will keep shorting it based on this fact. They’ve lost a fortune so far and they won’t stop.
Wedbush suggests that the TSLA stock four digit P/E is like the dot-com internet bubble. I totally agree if they were talking about the new SPAC entrants like Nikola (NASDAQ:NKLA) or Workhorse (NASDAQ:WKHS). Those have no current business as they are trying to carve one out of this budding EV market. But this is absolutely a false statement for Tesla because it already has a thriving retail business. Back then investors were chasing internet hopes and dreams of having a sales pipeline.
Judging a growth company from its profitability is wrong. Running lean is a requisite for companies pursuing expansions. Just ask those who shorted Amazon (NASDAQ:AMZN) for a decade on that criticism. They too lost fortunes doing it.
Value metrics are appropriate to use on more mature companies like Apple (NASDAQ:AAPL). Tesla and other fast movers need other perspectives. I point to the price-to-sales as the more appropriate one. In this case, it’s 25x, which is somewhat high but not exorbitant. Before the stock explosion that TSLA stock had this year, that P/S was under 10x.
Nevertheless, it is still cheaper than Nio (NYSE:NIO) and 10 times cheaper than Snowflake (NYSE:SNOW).
Investors Expect a Lot and For Good Reason
Investors have a lot of hopium already in the stock. Except for a short stint last year when Elon Musk went off the rails, they have not wavered. Since the “funding secured” debacle, management righted the financials and it is now on solid ground. It’s the rabbit to chase in EVs. Even the auto giants are chasing it and it has a long runway.
Tesla’s most amazing feat is busting the door open for EVs. We’ve had electric vehicles since the 1880s. All other ventures to topple the internal combustion engine (ICE) have failed. For some reason those other efforts came in the form of funny-looking cars. Tesla’s approach was more like Steve Jobs with Apple. They saw an idea they liked and they made it cool and marketable.
The ICE is still king and the electric alternative still has decades of work. But that all spells upside potential for Tesla stock. If management can continue to execute on plans this well the sky is the limit.
The 2020 test was as hard. It was even worse for Tesla because it was already against the ropes from its self-inflicted wounds. Somehow they pulled it off, which won over a lot of new fans including yours truly. Sometimes they fall short, like in the robo-taxi promise. But they have avid fans who have so far overlooked the shortcomings.
I would still like to hear more about the other ventures outside of the car market that they have in the pipe. This was an integral part of its bullish thesis because as a car maker, TSLA stock is way too expensive. They need to fold in the other stuff so that Wall Street continues to price it like a tech company and not General Motors (NYSE:GM) or Ford (NYSE:F).
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.
