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Is Tesla Stock Heading for a Crash?

Maitali Ramkumar - Author

Jan. 9 2020, Published 7:51 a.m. ET

Tesla’s (NASDAQ:TSLA) stock price closed at a record high of $492 on Wednesday. While the stock gained about 74% in the fourth quarter of 2019, it has risen 18% year-to-date. The stock has maintained the positive news that started with its third-quarter earnings. While shorts continue to burn, bulls are getting charged for the next upswing, which could lead to the stock being over $500.

However, with a rapid rise in Tesla stock, investors wonder if a crash is around the corner. Let’s evaluate this possibility by looking at the stock’s technical position, valuation, fourth-quarter expectations, and growth trajectory.

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Tesla stock’s technical position

We’ll review Tesla stock’s technical parameters like the RSI (relative strength index), implied volatility, and moving averages.

Beginning with the momentum indicator RSI, Tesla stock’s 30-day RSI is 80. Usually, an RSI below 30 shows an “oversold” status, while a level above 70 indicates an “overbought” status. So, the company’s RSI represents an “overbought” status, which means that the stock price could fall.

Besides, the implied volatility in the stock has risen by 29 percentage points in the past month. Usually, higher implied volatility means that traders are worried about the risk in the stock or they’re becoming fearful.

However, Tesla’s 50 DMA (day moving average) is way above its 200 DMA—about 35% higher. The moving average shows that Tesla stock is trading in bullish territory. Also, the chances of the 50 DMA breaking below the 200 DMA are slim.

So, two of the three technical parameters suggest caution in Tesla stock at these levels.

Valuation touching the roof

Tesla’s higher stock price has boosted its valuation. Wall Street analysts expect the company’s earnings to switch to profits in 2020. They expect Tesla’s EPS to rise from an estimated -$0.4 in 2019 to $5.8 in 2020. The company’s current price trades at 84.4x its 2020 forward EPS—the highest in the industry.

In comparison, Ferrari (NYSE:RACE) stock, which is considered to be a “recession-free” stock, trades at 40.9x its forward PE ratio. Traditional automakers trade lower. They all trade below 10x the forward PE ratio. General Motors (NYSE:GM), Ford Motor (NYSE:F), and Fiat Chrysler Automobile (NYSE:FCAU) stocks trade at 5.4x, 7.2x, and 5.2x the forward PE ratio, respectively.

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With the rise in Tesla stock, its market cap has expanded to $89 billion. The market cap exceeded Ford and General Motors’ combined market caps. Their market caps are $36 billion and $50 billion, respectively. Jim Cramer thinks that he might pause getting bullish on Tesla stock. The stock’s value is double traditional automakers.

However, many stalwarts aren’t fans of Tesla’s valuation. Jim Chanos has never been comfortable with the company’s valuation. Oppenheimer and Tocqueville thought that Tesla stock was overvalued in November. Valuation stalwart Aswath Damodaran didn’t favor the company’s valuation in April 2019. All of these people and firms would presumably be more uncomfortable with Tesla’s current record highs.

Tesla’s fourth-quarter expectations

Tesla’s record deliveries in the fourth quarter should pump up its revenues in the quarter. Wall Street analysts expect Tesla to post an EPS of $1.6 in the fourth quarter. The EPS would represent a consecutive quarter of profit for the company—a vital milestone that investors expect it to achieve. If the company falters, then its stock would nosedive.

In the third quarter, the company posted a surprise profit. Analysts expected a loss. As a result, Tesla stock rose about 20% in a day. The profit also kick-started a steep rally, which has taken the stock to the current record highs.

Tesla stock’s growth path

Tesla stock is rising due to clarity on its growth trajectory. In 2020, the ramp-up of Model 3 in China and the start-up of Model Y in Fremont should be the volume and revenue growth drivers for the stock.

Beyond 2020, the Gigafactory 4, Cybertruck, and the production of Model Y in China and Model 3 in Europe should boost the company’s growth. Read How Is Tesla Stock Positioned for 2020? to learn more.

Tesla stock is trading at a record high due to its growth story. At this level, technical parameters suggest caution. Also, the valuation looks stretched. Although the company has an intact growth story, any deviation in the fourth-quarter earnings could send the stock on a sloppy path.


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