Tesla (NASDAQ:TSLA) may be down nearly 20% over the past month, but we wouldn’t jump to the conclusion that now’s the time to buy the dip. Mostly because of the wobbly foundation that’s currently propping up the Tesla stock price.
Despite a bevy of troubles with its core electric vehicle business, TSLA continues to sport a rich valuation. At current prices, TSLA sells for a staggeringly-high 82.4 times forward earnings.
Tesla is able for now to maintain such a high forward multiple, due to the view that this “tech company that happens to build cars” will soon become a leading AI contender.
The company’s stock price could be sustained by an AI-related announcement, but failure to deliver one poses a major risk. With this in mind, let’s take a closer look, and see why it’s still best to steer clear of TSLA.
Why Tesla Stock Has Held Up Relatively Well
A 20% drop in a matter of weeks may not sound like an example of resiliency, yet if you compare Tesla’s price performance to the spate of bad news out of the company during this time frame, perhaps shares have held up relatively well.
This moderate price decline follows some major disappointing news. Back in July, Tesla reported mixed quarterly results and weak updates to guidance, including lower margins and a walked-back growth forecast for the full year.
The company last month also once again delayed the much-anticipated unveiling of its Robotaxi. As we discussed earlier this month, the latest China-related news regarding Tesla isn’t exactly cause for celebration, either. So then, why has all of this news fail to fully shatter the bull case for Tesla stock?
Again, it all has to do with AI, and no, not just Tesla’s efforts to bring humanoid robots to market. While not certain, a major reason why investors remain willing to price TSLA at a massive premium to other automotive stocks has to do with speculation that an investment in Tesla will soon include exposure to CEO Elon Musk’s xAI venture.
Expect Big Trouble if This Happens
In short, whether Tesla stock surges or sinks from here may hinge highly on whether a Tesla-xAI collaboration soon comes to fruition.
However, before examining the potential negative impact of such a deal not happening, let’s consider that a tie-up with x.AI may not necessarily be a silver bullet for the company and for the stock.
Yes, excitement about the generative artificial intelligence growth trend has stabilized in more recent weeks. Still, concerns about it already reaching its peak continue to loom. In the months ahead, if it becomes more clear that a slowing economy will affect Big Tech’s big bet on GenAI, sentiment for this investment theme could once again sour.
If such a scenario plays out, a Tesla investment in xAI may not impress the market. Worse yet, if Tesla doesn’t enter a deal with xAI, or pursue any other AI opportunity for that matter, this will really call into question the aforementioned narrative propping up shares.
If this happens, even the TSLA bulls will have to start conceding that Tesla is an automaker experiencing a rough patch. In turn, shares could experience a major derating to the downside.
The Verdict: Play it Safe, by Staying Out of Tesla’s Way
Back in early 2023, when pessimism last peaked for Tesla, shares fell to prices not that far above $100 per share. Between now and the end of 2024, history may not repeat itself. However, it could rhyme. What do we mean?
If an xAI deal fails to happen, and/or the market continues to get over its past “AI mania,” TSLA could once again go back to being judged by the performance and prospects of its EV business. Investors may still give the company some benefit of the doubt, pricing-in a post-slump comeback, yet shares could still fall to a far lower valuation.
For instance, let’s take the current sell side consensus for 2024 earnings, which currently comes in at $2.40 per share. If we slap a 50x multiple on it, what do we get? $120 per share. That’s nearly 40% below current prices.
Weighing this high downside risk against questionable upside potential, we come to a clear takeaway. As before, your best move with Tesla stock is to play it safe, by staying out of its way.
Tesla stock earns a D rating in Portfolio Grader.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
On the date of publication, the responsible editor did not have (either directly or indirectly) and positions in the securities mentioned in this article.
