Buying Tesla (NASDAQ:) stock has been a very profitable trade when it goes through a major correction. As we bid farewell to 2021, the world's largest automaker by value presents a similar risk-reward bias.
Tesla shares, after falling more than 20% since hitting a record high in early November, are in a bearish period. With that steep incline, the electric car manufacturer's market value dropped below $1 trillion.
Tesla shares closed at $926.92 on Thursday, with December set to be the worst month since March 2020. The stock is also down more than 21% from its all-time high of $1,229.91 on Nov. a bear market. which is defined as a drop of at least 20% from a peak.
But long-term investors in Tesla stocks are used to these ups and downs, often prompted by CEO Elon Musk himself. The last onslaught of sales pressure started after
Musk publicly announced that he would sell his 10% stake in the company after conducting a Twitter poll. Since then, he has sold a total of $12.7 billion worth of shares in a five-week period.
Tesla's extreme volatility, without any fundamental catalyst, highlights the dilemma faced by many long-term investors averse to extreme moves. Even after the recent plunge, Tesla stock is still up 36% in 2021, after rising more than eightfold the year before. this share from a fundamental standpoint. Tesla undoubtedly dominates the electric vehicle market and its lead would be hard to top, but its shares are trading at extremely high multiples.
According to InvestingPro's analysis, Tesla stock is trading at a 12-month price-to-earnings multiple of 279, a level that has set the performance bar so high that there's no room for the automaker to make mistakes when it comes for financial performance.
Because of this extremely rich valuation, Tesla's stock could be a risky bet based on the InvestingPro model, which allocates Tesla $743.35 per fair value, a 22% downside risk from current levels.
That said, any dip in Tesla stock has proved a lucrative trade for dipped buyers. According to Adam Jonas of Morgan Stanley, Tesla will remain the leader in EV production, batteries and autonomy for the foreseeable future, making it a suitable candidate for long-term investors.
His recent note stated:
“We look ahead to FY22 with expectations of strong auto profitability, but increasingly difficult assemblies and potential story changes that could challenge conventional expectations about EV strategy. If you must have stocks in this industry, be very selective.”
About Tesla Jonas added:
"The company integrates a high-growth, high-margin software company that has the potential for highly recurring revenue from its connected car software and services."
Wedbush Securities, one of Tesla's most optimistic forecasters, gave the stock a new price target of $1,400 and said the company could gain half of what is expected to be a $5 trillion EV market.
According to analyst Dan Ives, Telsa should benefit from both President Joe Biden's $550 billion infrastructure bill, which will boost the country's electric car industry, as well as from improving demand in China.
His note added:
"This green tidal wave will result in a $5 trillion market opportunity over the next decade, with Tesla leading the way."
Bottom Line
Tesla shares are likely to remain volatile in 2022, given the high speculative interest in this name. That said, investors could benefit from any pullback that moves their stocks closer to their fundamental value, as calculated by the InvestingPro models.
