One researcher feels that Tesla stock is too expensive and is in bubble territory after the share price tumbled on Monday as it debuted on the S&P 500 and ended 6.5% down from a record high in the previous session.
Tesla (TSLA) ended down 6.5% from a record high in the previous session, its steepest one-day drop in over a week. Losses steepened towards the end of the session after Reuters reported that Apple (AAPL) is targeting 2024 to produce a passenger vehicle that could include its own breakthrough battery technology.
The company's shares had opened down nearly 5%.
The electric car maker, headed by billionaire Elon Musk, is the most valuable company ever admitted to Wall Street's main benchmark and accounted for a 1.69% weight in the index ahead of Monday's trading. The shares had surged almost 60% since mid-November, when Tesla's debut in the S&P 500 was announced, and have soared almost 700% so far in 2020, Reuters explained.
Tesla jumped 6% on Friday in frantic trading ahead of its S&P 500 entry.
“While Tesla is a great company, Tesla stock has very strong signs of being overpriced,” Vitali Kalesnik, partner and head of research in Europe at Research Affiliates, told CNBC.
Kalesnik believes Tesla’s share price is too high given its sales, car production numbers and other fundamentals, CNBC explained.
“When we’re looking at the types of assumptions that we need to justify these valuations, one would need very, very aggressive assumptions,” he said. Tesla’s margins are “largely on par” with the rest of the industry and Kalesnik said that means Tesla’s current valuation is in the bubble territory.
.“When it’s included into the S&P 500, investors have to buy it at a very high price, and that is likely to produce pretty bad consequences to the investors,” said Kalesnik.
Despite his concerns, Kalesnik said he would not recommend shorting Tesla’s stock. “The bull market for Tesla can outlast your capital and your appetite for the shorts,” he said. “But given the volatility, you can burn very significantly.”
Tesla's addition to the S&P 500 led index-tracking funds to buy $90 billion of shares by the end of Friday so their portfolios reflected the index, according to S&P Dow Jones Indices' analyst Howard Silverblatt. The change was effective prior to the open of trading on Monday, and Tesla is replacing Apartment Investment and Management Co.
Actively managed funds that benchmark their performance to the S&P 500 must now decide whether to buy shares of Tesla, and risk underperforming if Tesla's recent rally continues and they do not own the shares.
"We put off that decision because we really believe the stock was running up into its inclusion in the S&P and that those who are in it for the arbitrage would sell starting today, and at least today, we are right," said Tim Ghriskey, chief investment strategist at Inverness Counsel in New York.
California-based Tesla's rally has put its market value at about $616 billion, making it the sixth most valuable publicly listed U.S. company, although many investors view it as wildly overvalued.
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