As Elon Musk dumps Tesla shares, should I buy?

As Elon Musk sells some of his Tesla shares, our writer considers whether there is a buying opportunity for his own portfolio.

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The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Elon Musk has had a successful business career, most recently in his roles at Tesla (NASDAQ: TSLA) and SpaceX. So, when he sells billions of pounds worth of shares in his own company, investors are bound to sit up and take notice.

In recent days, Musk has sold over £3bn worth of Tesla shares. That might be a selling signal. But alternatively, it could upset the market and provide me with a buying opportunity for my portfolio. Let’s consider the options.

Why is Elon Musk selling Tesla shares?

Musk hasn’t become as successful as he is by behaving in conventional ways. So while his use of a social media poll to gauge opinion on whether he ought to sell some of his Tesla shares was unusual, in itself I don’t think it is that important.

The bigger point here is that Musk is selling some of his shares. Other insiders have also been unloading Tesla shares on the market in recent weeks. Could that be a sign that the company’s management now sees its stock as overpriced?

Are Tesla shares overpriced?

The share sales could indeed suggest that Musk and others see Tesla shares as overpriced. After all, last month the company reached a market capitalisation of over a trillion dollars. That is a heady valuation even if one foresees strong future demand for electric vehicles and other technologies Tesla is developing, such as battery storage.

However, people have been saying that Tesla is overvalued for years, yet the company’s share price has often confounded its critics. Locking in some profits at the current price could be a way for Musk to diversify his portfolio, a commonly used risk management approach. It doesn’t necessarily mean he thinks the shares are overvalued. It’s also worth bearing in mind that the sales reported on Monday and Tuesday this week amounted to only 3% of Musk’s Tesla holding. He still has a huge amount of his personal wealth tied up in Tesla shares.

Is this a buying opportunity?

The market has reacted nervously to the sales, with Tesla falling 13% in five days at the time of writing this article earlier today. The shares are still up 156% over a 12-month period, however.

If I felt bullish on Tesla, this could be a good opportunity to start a position in the shares while the price is cheaper than it has been recently. I do think there is a lot to like about the company, from its vertically integrated business model to the loyalty it engenders in many customers. But thinking a company is attractive isn’t the same as finding its shares attractive.

Even if Tesla continues to dominate the electric vehicle industry — which I think it will struggle to do as competitors invest in building their own capabilities — its current valuation looks rich to me. That doesn’t mean it might not grow into it over time, but for that to happen a lot needs to go right. I would rather invest in a company where I think less needs to go right to justify its current valuation, such as Alphabet or Apple. So, I won’t be buying any of the Tesla shares Elon Musk is selling.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Christopher Ruane has no position in any shares mentioned. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Alphabet (A shares) and Apple. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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