Yesterday, Tesla (NASDAQ:TSLA) shares dipped below $1,000 for the first time this month. From the highs of $1,222 seen a month ago, this meant that the shares had fallen by 20%. This technically puts the stock in bear territory, which could indicate that there’s further room for the share price to move lower in coming weeks. Here are a few reasons that could drive this move lower.
Valuation concerns
In my opinion, one of the main reasons for the 20% correction and the potential for more is the valuation. I wrote about my unpopular opinion back in late October when Tesla shares broke above $1,000 for the first time. When I look at traditional valuation metrics such as the price-to-earnings ratio, it just seemed too stretched.
Back then, the P/E ratio stood at 332. To put this in perspective, the average FTSE 100 P/E over the past couple of years has been around 15. Granted, stocks within the NASDAQ index have higher P/E ratios given the weighting to tech stocks. Yet it was still a red flag to me when considering potential investment options.
I think that some investors are uncomfortable holding shares with this high a ratio, hence the correction lower. Now that the price is moving down, it can become a spiral as others realise that they might have bought based more around speculation than fundamental value. This could trigger more selling.
More exciting alternatives to Tesla shares?
Another reason why I think Tesla shares could continue to drop is due to more EV investing options being available elsewhere. Tesla is no longer the star of the EV market in my opinion. Both Rivian and Lucid Motors have gained a lot of attention in recent months. These companies are nowhere near the production levels of Tesla, but this early stage could actually attract more investors.
Being able to buy shares at the beginning of the journey as a public company could offer higher rewards in years to come. So I think Tesla shares are perhaps becoming a less attractive option for people seeking exposure to the EV market.
Risks to my view
In the short term, Tesla shares took a hit yesterday from a report that the SEC has opened a case on the company regarding whistleblower complaints. We’ll have to see how this plays out. But I think that the above two reasons are more structural points to suggest that the share price could continue to fall.
I could be wrong here in my view. I’ve been bearish on Tesla shares for over a year, but the share price is up 55% over a one-year period. Speculative flows can keep a share price elevated for longer than I might expect. Further, Tesla is now a profitable company, so strong results looking forward could reduce the elevated P/E ratio.
But I won’t be investing in Tesla shares any time soon. However, I am positive on Rivian shares, so I do see value in the EV market in general.
