Tesla Stock: What the Bulls and the Bears Are Getting Wrong

Key Points

• Tesla stock continues to fall on many macroeconomic concerns, including production shutdowns in China and rising interest rates in the United States. 
• The push and pull between bulls and bears proves that a stock is worth exactly what investors are willing to pay.  
• Fundamentals work in favor of the bears; but conviction may be on the side of the bulls.  

Tesla, Inc. (NASDAQ: TSLA) is not bringing much holiday cheer to investors. In a shortened trading week, Tesla is one of MarketBeat's Most Active Stocks by dollar volume. But that volume is significantly lighter in a week like this than in a typical trading week. And it's heavily in favor of sellers. 

Nevertheless, according to Vanda Research senior strategist Viraj Patel, "retail investors have bought more Tesla stock over the last six months than they have done overall in the 60 months before this (December)." 

So, who's right? The answer for bears lies in the fundamentals. But for bulls, the answer may lie in psychology.  

Fundamentals Continue to Signal Poor Q4 Earnings 

The bulls may be underestimating the fundamental picture for Tesla, which justifies a bearish outlook. Let's put to the side the number of shares (and billions of dollars) that founder and CEO Elon Musk has sold in recent months. Let's also not assign too much value to Musk's focus on Twitter. He'll be focused on Tesla soon enough.  

But what issues await him in 2023? First, the company is the leading electric vehicle manufacturer in China. And investors sold TSLA stock sharply over concerns about a production halt at Tesla's Shanghai plant. Plus, Tesla recently issued an incentive for U.S. consumers to receive a $7,500 discount for delivery before the end of 2022.  

That suggests the company is concerned about delivery numbers. You can add to the company's concerns about more competition in electric vehicles (EVs). And the icing on the cake is a weakening global economy with rising interest rates that make consumers less likely to "invest" in a vehicle that is still priced as a luxury. 

These concerns all point to the likelihood that Tesla will miss its quarterly earnings in January. The bears will argue that they are trying to get ahead of that negative earnings report by bringing down the still premium valuation for TSLA stock.  

Tesla Has Always Been Fueled by Emotion 

Tesla went public in 2010. This means that Tesla built out its EV infrastructure at a time of (mostly) lower interest rates and an economy that was (mostly) thriving. That helped to justify the stock's premium valuation even when the fundamentals suggested otherwise. 

The stock gained a loyal; some might say cult-like, following. The belief was in Musk. Tesla was seen as a technology company that happened to be in the electric vehicle (EV) business. It was an example of a stock worth whatever investors were willing to pay.  

If you bought and held TSLA stock for that entire time, you're sitting on a gain of over 7,000%. And even in the last five years, Tesla stock is up more than 450%. 

But markets tend to have a "what have you done for me lately?" outlook. And in the last year, TSLA stock is down over 68%. So so does the question become, who is doing the selling? 

The Key Word is Conviction 

This leads me to the point that the bears may be missing. For years retail investors have been burned by selling into a panic only to see the same stock climb sharply as institutional investors jumped in to snap up shares.  

I'm not referring to meme stocks such as GameStop Corp. (NYSE: GME) and AMC Entertainment Holdings Inc. (NYSE: AMC). Those companies have concerns regarding their fundamental business models. However, that's not the case with Tesla. Although the company faces a host of macroeconomic issues, the company is not going bankrupt.  

That's why I put Tesla on my list of five down but not out stocks. I did so because the sell-off in TSLA stock seems disproportionate to the company's revenue and earnings growth.  

Some things are working in Tesla's favor. First, the company's profit margin is nearly double the sector average. And even though the company is likely to slow down or even a decline in revenue and profits in the upcoming quarter, the five-year outlook still shows strong growth. Tesla is still miles ahead of many competitors when the economy becomes more favorable. 

That would suggest that TSLA stock's sell-off may be overdone. However, there's no doubt that bulls continue to swim against a current of higher interest rates and the near certainty of a recession. And if Tesla lowers its guidance in 2023, the stock may have further to fall, particularly if the investors who are selling were part of true believers.  

But, for now, retail investors are convinced about Tesla's long-term future. And if those bulls continue to have diamond hands, the bears may not get the result they're looking for.