If a CEO thinks his company's stock price is too high, it's a red flag that the company's fundamentals cannot support the inflated valuation of the market. That, in all likelihood, was the message Tesla (NASDAQ 🙂 CEO Elon Musk sent to his dedicated followers and investors when he tweeted on Friday:
"Tesla share price is too high imo (in my opinion)"
Tesla shares plummeted more than 10% after that, indicating that the message was received – at least by some.
But that weakness was short-lived. On the following trading day, the stock had recovered and returned to where it was before Musk's tweet. Intra-day Tuesday, it was trading at a $ 778 level, before closing at $ 768.21, up 0.92% for the day. The stock has also increased 86% this year.
The rapid recovery certainly shows that there is great momentum behind the current rally that made Tesla one of the best-performing stocks among technology giants this year. But if history is a guideline, long-term negative comments from Musk send a strong sales signal to Tesla investors.
Baird Equity Research reviewed the past four incidents in which Musk spoke negatively about Tesla's stock price. In the three most recent events, the electric vehicle manufacturer's shares remained in the red for one year, while Tesla fell 30% in the 2013 episode the following month. Eventually, it recovered over the next one-year period, according to the study conducted by CNBC.
Bullish Sentiments
However, there is strong evidence that the automaker has turned a corner after a series of missteps in 2019. The company has posted better-than-expected deliveries even during the coronavirus pandemic. That series of better earnings reports has led many analysts to become bullish on the stock recently.
Last month, Goldman advised Sachs to buy Tesla with a price target of 864 per share, one of the highest on the street. Goldman analyst Mark Delaney wrote that Tesla has a significant lead over other automakers in producing electric cars and is expected to maintain a strong market position.
Despite this optimism, it would be naive to think that everything will go according to plan, especially now that the global economy has been turned upside down by the coronavirus pandemic. Car production is currently halted and sales are slipping as the economy enters a deep recession.
That's why last week Tesla discontinued year-round car delivery guidelines. That measure originally targeted more than 36% growth this year before the pandemic. The combination of slowing car sales and the likely worse cash burn this quarter means it will be even more difficult to justify Tesla's current share price.
But in general, the current market is not focused on income. Investors generally have their eyes on the post-pandemic world, where low interest rates will fuel a new consumer boom and help companies like Tesla.
Bottom Line
Musk & # 39; s warning that Tesla & # 39; s shares are being overvalued indicates difficulties the company has in meeting its sales targets when the economy goes into one of the deepest recessions of years. Short-term investors should consider that warning as an opportunity to make a profit and move to the sidelines. And for anyone interested in buying shares, it is better to wait for another better entry point.
