This is not going to be a hatchet piece on Tesla (NASDAQ:TSLA) or Elon Musk. I’ve long since given up trying to explain the phenomenon that is Tesla stock. Nevertheless, I’m a bit surprised by its drop over the last month.
Now I will grant you that an 8% dip is not significant. That’s particularly true when the stock remains up 10% in 2021. But it does make me wonder.
Tesla was one of the first stocks that analysts saw as being decoupled from reality. When Tesla stock was the anomaly, investors seemed less concerned. However, now that many stocks are beginning to look pricey, is this the start of something more?
That’s what this article is going to explore.
Now Fundamentals Matter?
One reason to explain the possible dip in Tesla stock could be the current supply disruption in semiconductor chips. I don’t dismiss that as a reasonable argument. However there’s been nothing reasonable about the way investors approach TSLA.
The Biden administration says it will be issuing an executive order to “identify and act to relieve supply chain choke points.” I’m not sure if that’s anything more than symbolism over substance. But regardless of what the federal government can or will do, I’m not willing to throw all my chips into that theory.
If something as fundamental as supply and demand didn’t affect Tesla stock when it was barely delivering cars, why would this matter now?
Why Did Tesla Invest in Bitcoin?
Early in February, Elon Musk announced that Tesla would shift nearly 8% of its cash reserves ($1.5 billion) to buy Bitcoin (CCC:BTC-USD). At first, the news was celebrated. But that celebration quickly turned into a bit of skepticism.
The thinking is that with Tesla now having exposure to Bitcoin, Tesla stock is likely to be more volatile. King Lip, chief strategist at Baker Avenue Wealth Management, whose firm has owned Tesla shares since 2015, remarked “This is better for Bitcoin than it is for Tesla.”
And Gary Black, the former chief executive of Aegon Asset Management, exited his positions in Tesla stock citing the company’s exposure to Bitcoin as one reason.
This tends to carry a bit more weight, being in Bitcoin does expose Tesla to risk. But again, I wonder why this matters now?
Stocks Will Fall Over Time
I’m not a big fan of the “this feels just like such and such” thinking. Every market has its own rhyme and reason. With that being said, the one thing that does feel a bit “dot-com-ish” about this market is that the FOMO (fear of missing out) level seems to be growing when it should be waning.
I didn’t begrudge the bulls a solid run after the sell-off in March. Once uncertainty gave way to a muddled, but clearer, view of the virus, it was natural that stocks would move higher. And with the market awash with stimulus and the Fed doing its part with interest rates, there’s nothing stopping stocks from moving forward.
Yet at the same time, many economists that I follow are unclear about the long-term health of the economy. The market prices equities forward. A pullback or correction, and perhaps a big one, is only a question of when. No asset class moves in one direction forever. Eventually gravity will take this market down.
Is This Time Different For Tesla Stock?
As I was writing this article, I was not surprised to see that I’m not the first person to have this sentiment about Tesla. It also doesn’t surprise me that this was a sentiment that’s been on investors mind for several years.
The concern of course is that many investors will simply ignore the warning signs. They’ll say it didn’t crash before it won’t crash now. And even if Tesla stock does drop 50% like it did at the onset of the pandemic, it will just come right back, right?
Maybe it will. Then again, maybe not. I apologize for not having a firm opinion, but I’m not clear myself. My intuition tells me that perhaps one or both of the issues mentioned above are giving investors a reason to do what they may have wanted to do for some time. The only question now is if this time really is different or if Tesla stock will continue to defy the odds.
On the date of publication Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Chris Markoch is a freelance financial copywriter who has been covering the market for seven years. He has been writing for Investor Place since 2019.