High-growth, high-valuation stocks have been hurting in the past months — but not Tesla. Could shares of the EV maker be next to crumble, or is this stock more resilient than its peers?
We, at Wall Street Memes, have been talking plenty about the unwind in growth stocks lately. Cathie Wood’s ARK Innovation ETF(ARKK), for example, has been down a whopping 50% since reaching its all-time high in price, in February 2021.
But one name has largely sidestepped what we believe to be the most prominent case of market bubble in the 2020s. Resilient, Tesla stock is still up 480% since the start of the COVID-19 crisis, and only 15% down from the November 2021 peak.
Is TSLA immune to the bearishness that has taken over mega-growth stocks in 2021 and early 2022? Or is a correction in Tesla shares only a matter of time?
Could TSLA be next to crumble?
TSLA currently represents about 9% of the ARKK portfolio allocation, and it is the ETF’s top holding by a wide margin. This is interesting, considering that growth stocks in general, represented here by the ARKK fund, are currently in a deep drawdown — but TSLA is not.
What if a correction in TSLA is yet to come? Stocks of similar characteristics, such as those with aggressive growth and high valuation profile, tend to correlate tightly.
Below is an example: what does Roku and Block (formerly Square) have in common? From a business model perspective, not much. But because both fall under the same high-growth, high-valuation multiple group, their stocks have behaved similarly in the past couple of years.
The more optimistic view
You can fight gravity, but you can’t beat it. The macro forces have been clearly pushing against stocks like TSLA in the past few months, causing many of them to unwind.
Therefore, it is not hard to understand why some may be cautious about holding Tesla shares amid an environment of rising interest rates and skepticism towards “stonks” that performed so well in 2020. But maybe TSLA has been resilient for good reasons.
Electric and autonomous vehicles are clearly in an uptrend. EV sales in the US are projected to grow from around 500,000 units in 2021 to a whopping 4.7 million in 2030. The market share of EVs is estimated to skyrocket from 3% now to nearly 30% in less than a decade.
Leading the industry by a lot is Tesla. Even Lucid, one of the hottest EV makers in the world today, may produce in 2030 only half the number of cars that Tesla already delivers today.
It is clear to us that Tesla, although currently valued at a scary 2022 P/E of 111 times, has strong fundamentals and leads an industry that has quite a bit of growth potential ahead. This could be an indication that TSLA stock might not be as fragile as others within the high-growth peer group.
It also helps that TSLA stock has “meme DNA”. Shares are consistently among the top 5 most popular on Reddit, according to Ape Wisdom. For as long as there is enough “buzz” around the name, Tesla is likely to benefit from retail investors’ bullishness.
Comments