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Should I buy Tesla shares after the US tech sell-off?

Image source: Tesla

Last week will likely go down as one that owners of Tesla (NASDAQ:TSLA) shares will want to forget. Should I regard the recent sell-off in US tech titans as a great opportunity to buy or does the electric car maker have further to fall? Let’s start by surveying the damage done.

How bad is the damage?

It’s certainly not pretty. Back in January, Tesla’s share price was close to breaching the $900 mark. Yesterday, it started trading at $697. A drop of over 25% is something we’d expect during a market crash like we experienced in March 2020, not in a recovery. 

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Of course, we need to keep things in perspective. While the speed of Tesla’s share price capitulation has been frightening, anyone who purchased a slice of the company one year ago would still be looking at a gain of around 350%! In fact, Tesla shares have only fallen back to the price they were changing hands at around Christmas. 

Why might Tesla continue falling?

Whether the rout of Tesla shares is completely over is, of course, impossible to say for sure. Even so, it’s not hard to come up with reasons as to why things could get worse before they get better.

First, there’s the valuation. At roughly $650bn, Tesla’s market capitalisation is still seriously overvalued based on any traditional metric. After all, it’s only just made its first full-year profit. Moreover, Tesla produces and sells far fewer cars compared to more traditional manufacturers that have lower valuations. Hype will only carry a share price so far. Eventually, it needs to be justified by the numbers.

A second reason why the share may continue falling relates to the increasingly bizarre decisions of CEO Elon Musk. The recent purchase of $1.5bn of Bitcoin is a prime example. Whether Musk’s cryptocurrency transaction proves to be inspired or reckless further down the line is not really the point. If I owned shares in a car company, I would rather it concentrated on making said cars rather than buying highly volatile assets.

On the other hand…

Having said all this, there’s a chance that the worst may be over for owners of Tesla shares.

For one, it’s increasingly clear that the widespread adoption of electric cars is now just a matter of time. In fact, it could happen a lot faster than first thought if potential buyers can be persuaded that ‘range anxiety’ is no longer an issue. Tesla will likely remain one of the most established players in this industry. This being the case, we may simply be seeing a temporary correction in the share price.

Another reason Tesla’s capitulation may prove short-lived is that excitable traders could simply ‘buy the dip’ and the cycle could continue.

A safer play

Regardless of whether it’s over or not, the recent fall in Tesla’s share price was overdue, necessary and healthy, in my opinion. No stock or market can continue rising without interruption forever.  

Given the still-incredibly-high valuation, I won’t buy shares in Tesla directly today. Instead, I’ll simply continue getting exposure via a selection of actively-managed and passive funds. One example of the former that I own would be FTSE 100 member Scottish Mortgage Investment Trust. An example of the latter that also has a place in my portfolio is the Legal & General UCITS ETF Battery Value Chain

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Paul Summers 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.