Tesla stock is blowing another bubble. But so what?

Tesla stock has soared by 75% in just three weeks, after the group posted upbeat Q4 figures. But I see these shares as back in bubble territory once more!

| More on:

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.

Burst your bubble thumbtack and balloon background

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Tesla (NASDAQ: TSLA) stock has skyrocketed by almost three-quarters since hitting a 52-week low earlier this month. To me, this suggest that shares in Elon Musk’s electric-car maker are being pumped up in a new bubble. But who cares?

Tesla stock soars in three weeks

Go back 14 months and Tesla shares were hitting all-time highs. On 4 November 2021, this hugely popular stock hit an intra-day peak of $409.97. But then tech stocks collapsed, with Tesla hit much harder than its peers.

At its 52-week low on 6 January, Tesla stock crashed to $101.81, before rebounding. Back then, I urged my wife to have a ‘punt’ on Tesla shares (buying them as a short-term trade, rather than a long-term holding).

On Friday, Tesla stock closed at $177.90, valuing the group at $562bn. The shares are now almost three-quarters (+74.7%) above their 2023 low. That’s a comeback worthy of Lazarus himself. And now I’m kicking myself that we didn’t board the Tesla bandwagon at recent lows. Urgh.

Are Tesla shares in another bubble?

Here’s how the shares have performed in the short and medium term:

One day11.0%
2023 YTD44.4%
Six months-40.2%
One year-43.0%
Five years676.2%

So while Tesla stock has surged by almost 45% in January, it is down around two-fifths over six months and even more over one year. However, it’s been a knockout winner over five years, turning $1,000 into $7,676. Wow.

To me, this recent leap in the stock price suggests that Tesla shares are entering another bubble phase. But what causes a bubble? According to economist Tim Harford, writing in the weekend’s Financial Times, financial bubbles need three elements: marketability (liquidity), speculation, and cheap money.

Tesla shares are highly liquid, being a popular ‘meme stock’ that attracts tens of millions of fans. Also, the cheap money to bet on the stock comes from short-dated options — financial derivatives that magnify gains (and losses). And, as I’ve written before, Tesla options are by far the most popular among S&P 500 single-stock options.

Also, as Tesla stock rises, buying demand and trading volumes increase. This seems counter-intuitive to me. Weirdly, Tesla shares behave like (luxury) Veblen goods, becoming more desirable as they get more expensive. To me, that seems crazy, as investing in Tesla appears more like a religion than a science.

So what?

In my 36 years of investing, I’ve lived through four major crashes (September 1987, 2000/03, 2007/09, and spring 2020). I’ve learnt that bubble investing is great, until it suddenly isn’t. It’s like how an Ernest Hemingway character describes going bankrupt: “Gradually, then suddenly”. In other words, bubble investing is a rush and a thrill, until it becomes acutely painful when the bubble bursts.

Summing up, who really cares if Tesla stock has entered another bubble or not? I shouldn’t, because I don’t own these shares. Even so, I still worry about naïve investors rushing to buy into a company whose valuation defies all known logic and fundamentals. Sure, Tesla is a great stock to trade, but I wouldn’t buy it at today’s levels. While the shares defy financial gravity for now, gravity has a nasty habit of dragging things down in the end!

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 assessed. Consider taking independent financial advice.

Cliff D'Arcy has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesla. 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.

More on Investing Articles

Black father holding daughter in a field of cows
Investing Articles

A FTSE 100 share that could create generational wealth

Investing in FTSE shares can help individuals pass down a significant chunk of cash to their children and grandchildren, data…

Read more »

Investing Articles

Here’s what the BT share price could mean for passive income investors

The BT share price has been falling for years, but that might be about to change. And dividends could be…

Read more »

Investing Articles

At £4.76, is the Aviva share price a steal? Here’s what the charts say!

Aviva has outperformed the Footsie over the last year. But is there still value in its share price? This Fool…

Read more »

Photo of a man going through financial problems
Investing Articles

Does a 43% price drop make this undervalued UK stalwart one of the best cheap shares to buy now?

After losing a third of its value of the past five years, this might be one of the most undervalued…

Read more »

Businessman use electronic pen writing rising colorful graph from 2023 to 2024 year of business planning and stock investment growth concept.
Investing Articles

My top 3 picks today for a £20,000 Stocks and Shares ISA

Here are three very different investments to consider for a Stocks and Shares ISA, covering both the UK and US…

Read more »

Businesswoman calculating finances in an office
Investing Articles

The Darktrace share price has been surging — and it could climb higher

I think the Darktrace share price could have more room to run. Despite the competitive AI industry, the firm looks…

Read more »

Young Black man sat in front of laptop while wearing headphones
Investing Articles

With its 7% dividend, should I be watching the Aviva share price?

Dividend investors will struggle to find many companies with a yield above 7%, so should the Aviva share price be…

Read more »

Investing Articles

Could this be one of the FTSE 100’s best cheap dividend shares?

Looking for the best dividend growth shares to buy? Our writer Royston Wild thinks this FTSE 100 housebuilder might well…

Read more »