One thing I’ve learnt from history is that humans don’t learn very well from the past. Financial history is littered with booms, bubbles and busts. Early asset bubbles include the Dutch tulip mania of 1634-37, the South Sea Bubble of 1720, and repeated railway manias in the 1800s. I personally observed the stock and property bubbles of 1980s Japan, the dotcom boom of 1995-2000, and the global financial crisis of 2007-09. Not all bubbles look alike, nor do they inflate identically. But eventually, they all burst painfully. Hence, here are two scary reasons why I would not buy Tesla (NASDAQ:TSLA) stock for my ISA at anywhere near the current price.
Tesla stock: the mother of all bubbles?
Earlier today, I explained why why I see Tesla stock as the mother of all bubbles. For me, TSLA is like no other bubble stock, largely because of its sheer size and scale. Today (Monday), Tesla enters the S&P 500 index as its sixth-largest member, behind the ‘big five’ tech mega-caps. Tesla is also the largest S&P 500 entrant ever. With passive S&P 500 tracker funds forced to buy TSLA stock, the share price has soared 70% since mid-November. At Friday’s close, Tesla’s share price hit an all-time high of $695, valuing the carmaker at $658.8bn. I pray this marks the peak of this gigantic bubble — and here are two reasons why TSLA isn’t for me.
1. Tesla stock has risen almost tenfold since March
At the end of 2019, Tesla stock closed at $83.67, but then added nearly $100 in 50 days, soaring to close at $183.48 on 19 February. Then Covid-19 sent global stock markets spiralling downwards. TSLA collapsed to $70.10 on 18 March, crashing by more than half (61.8%) in a month. However, anyone buying Tesla back then and holding on has made almost 10 times their money. Indeed, many TSLA stockholders have amassed life-changing paper profits. However, while I might just have dipped into Tesla stock in March, I would never do so today at nearly 10 times the price. That’s because I won’t buy into frothy bubbles.
2. Tesla is worth almost as much as all other carmakers combined
By market value, Tesla is the world’s most valuable car manufacturer by a gargantuan margin. Market leader Toyota will sell around 9.5m vehicles this year, yet is worth just $250bn — that’s almost $410bn less than Tesla. To get near to Tesla’s current equity value means adding up the combined market values of the top seven or eight carmakers. Also, Tesla’s valuation is approaching the collective valuation of the rest of the global car-making industry combined. Yet Tesla will sell only half a million of the 61.9m cars forecast to be sold in 2020. How could a business with a 0.8% market share possibly be valued almost as much as the other 99.2% put together? To me, this is yet another huge warning sign flashing red over TSLA.
In my view, Tesla stock is in a massive bubble similar to the one I shunned in 1999-2000. It has been inflated by millions of momentum-driven retail investors speculating in Tesla shares. When this bubble eventually bursts, I expect TSLA to decline steeply. The same happened in the dotcom bust of 2000-03 and again in 2007-09. And I think it will happen again, when financial gravity overwhelms the Robinhood herd. That’s why Tesla stock won’t be going anywhere near my tax-free Stocks and Shares ISA in 2020-21!
Cliffdarcy has no position in any of the shares mentioned. The Motley Fool UK owns shares of and 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.