Are Tesla Shares Still A Buy-The-Dip Play After 40% Plunge This Year?
2022.06.21 08:31
- Current macro environment hostile for high-growth companies
- Losses in Tesla stock accelerated after CEO Elon Musk offered to buy Twitter
- Some analysts see value in lower-priced stock
Tesla (NASDAQ:TSLA) has been a great buy-on-the-dip bet since the pandemic hit in early 2020. Every time the world’s largest electric carmaker went through a steep downfall, it rebounded quickly and rewarded its faithful investors.
But as economic headwinds gather pace and some economists predict a recession just round the corner, it’s difficult to predict whether the Texas-based Tesla will again reward patient investors who continue to stick with it.
Judging from the reaction in the market, it seems Tesla shares are in a perfect storm. They have fallen close to 40% this year, double the losses the benchmark S&P 500 suffered during the same period. They closed Friday at $650.28.
Tesla Weekly Chart.
The losses for the stock of the electric car-maker accelerated since CEO Elon Musk offered to buy Twitter (NYSE:TWTR) in a $43-billion deal in April. TSLA shareholders, however, didn’t like this idea. They feared Musk would be spread too thin if he tried to overhaul Twitter while also running Tesla and overseeing his Space Exploration Technologies Corp.
Musk also planned to use some of his Tesla stock as collateral for loans to pay for the Twitter deal, though his latest financing doesn’t include share pledges.
Prolonged Downturn
Besides the Twitter overhang, the current macro environment is quite hostile for high-growth companies like Tesla. Factors such as higher raw-material costs, supply-chain bottlenecks and production disruptions in China are pointing to a prolonged downturn for growth stocks and bleak odds for a quick rebound rally.
Sentiment in the market are so negative that a recent decision by Tesla to seek approval for a 3-for-1 stock split didn’t create any excitement. In contrast, a similar move by the Austin, Texas-based EV maker in 2020 contributed to a 60% jump in the share price from the day of the announcement to the execution date.
Despite this challenging backdrop, some analysts see value in Tesla’s beaten-down stock price and are recommending long-term investors take advantage of this weakness.
Analysts at RBC upgraded Tesla to outperform from their market perform rating last week, saying in a note to clients that Tesla should be able to fend off competitors long term due to its supply-chain investments. Its note added:
“As EVs enter their third phase (everyone has EVs out there) in the mid-to-later part of the decade, we believe being able to deliver EVs will increasingly depend on the supply chain.”
“While TSLA is fairly secretive about the deals they have cut for supply of raw materials, in talking to contacts we believe they have done more than other OEMs. The company’s early focus on vertical integration (not just batteries/raw materials but also motors, semis, software) is likely to pay off.”
RBC, however, did trim its price target on Tesla to $1,100 from $1,175. The new target is roughly 69% above where the stock closed Friday.
UBS, in its recent note, said it’s the “time to be bold” and upgraded Tesla to buy from neutral. The firm reiterated its $1,100 price target on the stock. Its note said:
“We believe the operational outlook is stronger than ever before. We expect Tesla’s vertical integration in semiconductors, software and battery to result in superior absolute growth and profitability in the years ahead.”
Morgan Stanley also reiterated Tesla as overweight, saying investors should stick with the stock after reports surfaced that Musk warned of a tough quarter in an email to employees. Its note said:
“Tesla has shown throughout its history, it can make up substantial lost ground with accelerated deliveries into the close of a quarter where disproportionate amounts of a full quarter’s production can occur in the final week or two. Additionally, what may be lost in 2Q could just provide pent-up sequential tailwinds for 3Q results.”
Bottom Line
After a massive sell-off in Tesla stock during the current downturn, some analysts see value at current levels, given the car manufacturer’s vast lead in the EV market and its excellent production track record.
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