Tesla stock declined 30% last week — that's proof that the company's legendary volatility isn't going anywhere, but it is a lot more expensive (TSLA)


Elon Musk

  • Tesla’s volatile stock has always made for amazing investment opportunities.
  • Investors who have recognized when a share-price decline is overdone have bought on big dips and enjoyed fantastic returns.
  • But Tesla has never been priced as high as it is now: even after a 20% bear correction, it’s still over $700.
  • Playing the Tesla-volatility game has become a lot more expensive.
  • Visit Business Insider’s homepage for more stories.

Tesla has always been a volatile stock. But in the good old days of 2019, you could buy all that risk-on volatility for a relatively cheap price — relative to what Tesla has been trading at lately.

Over the last few weeks, some investors have bought Tesla shares at close to $1,000. Sellers might have been in the stock since it was around $200, so one can easily understand why those folks who quadrupled their money would want to head for the profitable exits. 

Meanwhile, the latecomers are betting on a future in which Tesla manages to vindicate a market capitalization that adds up to four General Motors. (GM, by the way, made over $8 billion last year and sold about 8 million vehicles worldwide, while Tesla finished 2019 in the red and sold around 370,000 cars.)

The latecomers are now in a world of hurt as Tesla swiftly entered a bear correction sliding 30% in a week. Weighing in investor optimism is a combination of worldwide and local effects of the coronavirus outbreak: Tesla is supposed to be firing up a factory in China, the center of the possible pandemic, and the carmaker’s supply chain is heavily exposed to China. 

There’s also been a broader market decline, adding to Tesla’s stock woes.

Tesla is trading at a whole ‘nuther level

Tesla Model Y

Big price swings are nothing new for Tesla investors. What is new is the level at which the latest dips have occurred. Absolute returns are an important factor with Tesla, but it’s indisputable that buying into the mega-rallies and epic swoons is now significantly more expensive than it was just six months ago.

Value investors, such as they are in Tesla country, don’t care because they’ve been on the lookout for major underpricings, in their analysis, for years. My favorite was when Tesla merged with Solar City in 2016. That deal dragged down Tesla stock, but some astute investors reckoned that the market as overreacting. They’re quite happy now, and have had many chances to take profits in the past three years.

Other investors realized that idle chatter about Tesla headed for bankruptcy — hedge-funder and short-seller Jim Chanos infamously declared the company “structurally unprofitable” in 2017 — was equally misguided and wagered against Chapter 11. Ka-ching for them!

And for what it’s worth, the truest of true believers, investors who’ve been holding shares since Tesla’s modest 2010 IPO, are up 3,000%.

Tesla is a falling knife, and that’s a hard thing to catch as an investor

tesla factory

Logically, Tesla shouldn’t be worth much more than about $200 per share (I’m being generous — a few years ago I figured $150 was a fair price). It has never posted an annual profit, the balance sheet has only enough cash to keep the business running for about a year, and Tesla is constantly returning to the markets to issue new equity to fund its yearly losses. To grow in accordance with bullish expectations, Tesla could wind up spending everything it makes and then some for a decade.

So it’s challenging to ascribe a bottom to Tesla’s share price. And the company hasn’t really faced a “black swan”-type global event such as the coronavirus outbreak, which could severely test a carmaker that lacks the scale to manage a multifaceted downturn. (Tesla was trivially small when it almost went out of business in 2008, as the financial crisis was raging.)

Savvy investors should of course be looking to buy Tesla with both hands if the slide continues, on the assumption that the company’s history of volatility could yield a tasty payday. But the timing is now quite tricky — Tesla is a falling knife, and who knows where it will land? — and the buy-in isn’t cheap. 

There’s also competition, as other, more stable companies with extremely low share prices relative to their business performance are also being dragged down. GM and Ford are each at 52-day lows. (For what it’s worth, Ford has a 5% dividend yield that you can now pick up for less than $7.)

The best time to buy Tesla has almost always been during periods of market overreaction to the downside. But that was when the market hadn’t already massively overreacted to the upside. The stock has, without question, now entered uncharted financial territory. Investors are about to be tested in a whole new way.

FOLLOW US: On Facebook for more car and transportation content!

Join the conversation about this story »

NOW WATCH: How Tesla’s Model 3 compares to Volkswagen’s new EV