Tesla and its creator, Elon Musk, are known for breaking new ground. The Model S, the world’s first luxury all-electric sedan, was introduced by the electric vehicle manufacturer in 2012. The Falcon Heavy, the world’s most efficient missile, was propelled six years later by Musk’s SpaceX. It was another first, when the Falcon launched the Tesla Roadster into space, rendering it the first electric vehicle to circle the Earth.
Musk has recently set financial milestones that are unable to match. Tesla’s nine-month meteoric rise from a market cap of $30 billion in mid-April last year to $849 billion on Jan. 26 dwarfs that of every other young upstart. Musk’s net wealth had risen to $185 billion by early January, putting the Tesla designer on a fresh pedestal as the world’s richest human.
Musk has just set a new financial record by seeing his shares lose the most money in the shortest amount of time. Tesla’s market capitalization has plummeted by 36% from its late-January high, falling from $883 to $566 at mid-morning on March 5th. In the history of the stock market, no corporation has ever seen such a massive decline in such a short period of time. Tesla’s market capitalization of $300 billion or more dwarfs all but the S&P 500’s top 16 stocks. Tesla’s market capitalization has plummeted by more than double that of Ford and GM respectively, and by $100 billion more than that of Toyota, the world’s second most successful automaker.
Which convince Tesla bulls that the stock has historically been a very volatile one, with large declines followed by strong recoveries to push the stock past previous highs. Last year, it lost half of its worth between mid-February and mid-March, and then dropped 34% in the first two weeks of September, only to roar back on both occasions. Tesla’s stock was slashed by $186 billion in September, but it regained it all, plus another $400 billion in the months to come. Perhaps, Tesla will hit several speed bumps along the road, but its long-term direction will be steeply upward.
Despite the 34 percent drop, Tesla’s stock would recover 56 percent to reclaim its previous high of $883 (and value of $849 billion). Investors concluded over night that Tesla would receive a lot less than they anticipated in late January.
What is causing Tesla to make such a significant retreat?
Assume that shareholders would demand at least a 10% total return in exchange for a potentially dangerous flight. Tesla needed to be worth $2.2 trillion by early 2031 to reach that level as of late January. Tesla will generate $73 billion in annual GAAP net profits if it had a premium price-to-earnings ratio of 30. That is $5 billion more than Apple, the S&P’s largest profit generator, produced last year.
The bar has now been reduced by lenders, but it remains prohibitively large. Using the same model, the bogey is already $1.44 trillion, and profits will have to hit $48 billion in 10 years. Tesla’s earnings of $721 million in 2020 would have to rise at a rate of about 50% per year to get there.
The fact that Tesla’s stock has plummeted so dramatically in just a short period of time demonstrates the incredible difficulty of determining its true value. Investors, on the other hand, have little or no idea how much Tesla can make in the future. Will the figure be $60 billion in 2031, $10 billion, something smaller, or anywhere in the middle? Making some kind of fair calculation necessitates so many assumptions that it is pointless. All that is left is a hot commodity, a visionary CEO, a cult base, and a compelling tale. What is left is a still-colossal valuation, which will only rise if great figures start rolling in quickly. Otherwise, Tesla is sitting on a pocket of air whose deflation will set new records that would be difficult to match.