It seems crazy to me that the shares of Tesla (NASDAQ: TSLA) are the ultimate meme stock. After all, this is an $853bn company, putting Elon Musk’s electric-car maker at #8 among the S&P 500‘s largest companies. Yet this has been the way of the world since the Covid-19 crisis of 2020/21.
Tesla’s roller-coaster ride
Tesla stock is hugely popular among Musk fans, retail investors, day traders, speculators, and gamblers. As a result, the share price goes up and down like a roller coaster. This volatility means that the shares often move by several percentage points each day.
This volatility in Tesla stock is also reflected in Musk’s persona, beliefs, and behaviour. He has attracted media criticism for his vocal and financial support for Donald Trump, his leadership of DOGE (the US Department of Government Efficiency), and his juggling of the multiple businesses he controls.
As a result, the Tesla share price is among the most unstable — and heavily traded — in the S&P 500. After Trump was re-elected as US president, the subsequent ‘Trump bump’ sent Tesla stock soaring like a SpaceX rocket. The share price surged to an all-time high of $488.54 on 18 December 2024.
However, Tesla shares have since come crashing back to Earth. As I write, they trade at $277.31, having plunged by almost half (-43.2%) since their Yuletide high.
This stock is super-expensive
As a sentiment-driven stock, Tesla has become untethered from reality. At current price levels, the shares trade on 152.6 times trailing earnings, delivering a tiny earnings yield below 0.7% a year. Also, as the group has never paid a dividend, this is not a holding for income investors.
I believe that Tesla is being pulled about by two opposite, powerful forces. On one hand, the firm’s fundamentals are so disconnected from the real world that financial gravity must surely pull this stock back to reasonable levels.
On the other hand, an army of millions stands ready to buy Tesla shares when they fall steeply. And this buying pressure — together with huge option trading linked to the stock — pushes up the price again.
Still, what might seriously harm Tesla’s future valuation is the damage done to the brand by Musk’s antics. Sales, revenues, and earnings are plummeting as would-be buyers walk away, especially in Europe. Indeed, the firm just unveiled its worst quarterly results in many years.
Then again, what might save Tesla is Musk’s commitment to invest heavily in artificial intelligence, robotics, and self-driving vehicles. If these cutting-edge bets do pay off, then Musk might choose to combine Tesla with one or more of his other high-tech business, such as X.AI Corp. That might put a rocket under this stock once again.
As for me, I note that one leading US investment bank recently lowered its year-end price target for Tesla to $120 a share. That’s a 56.7% drop from here, so I predict more wild times for Tesla stock this year!
