Tesla (NASDAQ:TSLA) had a great 2020. Despite the COVID-19 pandemic, Tesla managed to deliver 36% more cars than it did in 2019. It rolled out exciting model upgrades and technology and got its financial house ordered enough to qualify for inclusion in the S&P 500. Investors were clearly excited about all this, sending Tesla share prices up over 700%.
But Tesla is having a rough start to 2021. Since hitting a record $900 per share in January, Tesla stock has been in a downward spiral. Even when Tesla reported its first annual profit and a 28% revenue increase for the year 2020 — its best-ever financial result — investors saw no cause to celebrate. On March 8, Tesla’s stock price dropped to $547, a five-month low. The stock now trades at $692 a share as of this writing, down about 23% from its peak.
So is the party finally over for Tesla? We don’t know for sure. Still, it would be great to zoom in on why investors are selling Tesla.
Caught up in the tech sell-off
Many of 2020’s hottest tech stocks are down this year thanks to a broader investor rotation from high-growth stocks into value stocks. Companies like Peloton Interactive and Zoom Video Communications are trading at least 30% below their record highs, while “reopening” stocks like Boeing and Lyft are up over 20% this year.
Because it tends to be grouped in with the most popular tech stocks, industrial stock Tesla has suffered along with the rest. But this is not surprising, since Tesla is one of the most expensive stocks out there. At its peak market capitalization of $837 billion, Tesla was trading at 25 times 2020 sales. Even after the recent correction, Tesla trades at 20 times sales. Industrial giant General Motors, America’s biggest carmaker by volume, trades below 1 times sales.
In other words, Tesla is still trading at nosebleed valuations. If investors keep fleeing to safety and value stocks, Tesla could drop even more from here.
An increasingly crowded EV market
As a pioneering electric vehicle (EV) manufacturer, Tesla enjoys a commanding market lead. EV news website Electrek reports Tesla sold 316,820 vehicles in the nine months leading up to September 2020. That gave it an 18% share of the global EV market. Volkswagen, ranked second with a 6% market share, sold 113,091 EVs over the same period.
But there are signs the battle for EV leadership has intensified and will remain difficult going forward. New players like NIO and XPeng are taking on Tesla in China, the world’s biggest EV market. BYD — a longtime EV player backed by Warren Buffett — launched its premium Han model in July 2020 to global acclaim. The company sold 40,556 units of Han by the end of the year, according to Bloomberg. And back home, General Motors and Ford are giving Tesla a run for its money as well. In fact, Morgan Stanley analysts estimate Tesla’s share of the U.S. EV market fell 12% in February, eroded by sales of Ford’s Mustang Mach-E.
For a long time, Tesla was the clear market leader. It sold hundreds of thousands of EVs, while not having to fret about serious competition. But today it’s clear that Tesla is no longer the only game in town. Investors are waking up to this fact — and that’s why they’re starting to question Tesla’s high valuation.
What’s next for Tesla?
With visionary genius Elon Musk at the helm, Tesla aims to be more than just an EV maker. Tesla is leading the charge into self-driving vehicles, giving it a shot at becoming a robotaxi company. The company’s renewable energy business is also picking up, with Tesla now involved in a battery storage project with Apple. In the long run, all these opportunities dramatically widen Tesla’s addressable market beyond EV manufacturing.
But Tesla’s sky-high valuation has already priced in these positives while leaving little margin for error. If the tech sell-off deepens, Tesla stock is in for a rough ride.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.