Will Tesla (TSLA) Reach a Trillion-Dollar Valuation Again?

The market capitalization of electric car maker Tesla, Inc. (TSLA), which accelerated to $1 trillion in October, fell below that mark on Monday, continuing an erratic downward slide that began last month.

For investors betting on an electric vehicle future dominated by Tesla, the company's share price performance might have come as a rude awakening after turbo-charged pandemic gains for the stock. They may be asking themselves whether Tesla can rebound and become a trillion-dollar company again.

Key Takeaways

  • Tesla is no longer a trillion-dollar company, and investors are asking themselves whether it will regain entry to that exclusive club.
  • Tesla's route to a trillion-dollar valuation was a relatively short one, driven by a global policy push and investor enthusiasm for an electric vehicle future.
  • Many analysts are betting that continued improvement in business fundamentals and a ramp-up of manufacturing capabilities could help Tesla regain its previous sky-high valuation.

Why Has Tesla Stock Declined?

The company's route to a trillion-dollar valuation has been a relatively short one; it has become the second-fastest company to achieve that distinction after Meta Platforms, Inc. (FB). But the drop has been equally precipitous. 

In the past five days, Tesla's shares have declined by 10.3%. As of this writing, the car maker's shares are changing hands at $942.08, down 2% from the start of trading. The company's total market capitalization is $946.67 billion as of this writing and continues to decline.

Pressure on Tesla's share price had been building for some time. Many analysts believe that the stock's valuation is inflated. Even with the recent slump in their price, the company's shares have a trailing price-to-earnings (P/E) ratio of 307.86. Peers like the General Motors Company (GM) and Ford Motor Company (F) have P/E ratios of 7.64 and 27.44, respectively, even though they sell more cars.

Another factor contributing to Tesla's recent descent is the exercise of stock options by its CEO and co-founder Elon Musk. The bulk sale has contributed to the stock's downward pressure, according to analysts. Musk's most recent sale was on Monday, Dec. 13, when he sold 934,091 shares for roughly $906.5 million. He has sold $2.87 billion worth of stock so far in December after selling $9.85 billion worth of stock in November. 

Macroeconomic factors are also responsible for Tesla’s fall. The markets fell into a swoon yesterday due to concerns over an impending Fed interest rate decision. A decision to raise interest rates by the agency could adversely affect stocks with inflated valuations because it could trigger an outflow of capital away from risky markets toward instruments and equities with safer returns.

Will Tesla Rebound? 

While the stock's fundamentals may have gone askew in equity markets during the pandemic, the company's business became stronger. It established new manufacturing facilities in Austin and Berlin. The Shanghai facility, inaugurated in January 2020, surpassed Fremont, California, in manufacturing capacity and became a hub for export of cars to Europe. The company also made advances in its self-driving experiments and developed new battery chemistry. 

Coupled with a global policy push toward green cars, analysts are betting on sustained improvement in business fundamentals for the company to keep its long-term story intact. Wedbush Securities analyst Dan Ives has put a price target of $1,400 on Tesla's stock. According to Ives, a "green tidal wave" will result in a $5 trillion market opportunity over the next decade, and Tesla will lead the way in the market.

Ives joins Jefferies Group analyst Philippe Houchois, who raised his price target for Tesla to $1,400 from $950 due to an "acceleration of self-funded growth in Q3 and un-heard-of returns at a brand rice point moving towards volume segments." According to Houchois, Tesla is more "scaled up" as compared to most original equipment manufacturers (OEMs) and "in position to Legacy zero-sum-game into a negative one." Meanwhile, Morgan Stanley's Adam Jonas, a noted Tesla bull, has a price target of $1,200 for Tesla stock.

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  5. Marketwatch. "Here's Why Jefferies Has the Highest Price Target for Tesla on Wall Street." Accessed Dec. 15, 2021.