Is Tesla Running On Empty?

Is Tesla Running On Empty?
Reda Farran, CFA

about 3 years ago4 mins

Mentioned in story

What’s going on here?

It’s no secret that Tesla’s stock is an investor favorite, widely owned by individuals and institutions alike. It’s also no secret that the eccentric electrician’s stock price has had a remarkable run – rising by nearly 700% over the past year. But as yet another volatile trading day this week sees shares fall 5%, it’s worth considering apparent parallels with the infamous dotcom bubble of the late 1990s. After all, history doesn't repeat itself – but it often rhymes.

What does this mean?

At around $800 billion, Tesla is now the fifth-largest US company by market capitalization. That’s particularly eye-catching given rival automakers General Motors and Ford each produce five times as many vehicles – but the two companies’ combined value is only $100 billion.

Before we investigate echoes of the dotcom bubble, however, let’s get a few things straight. Tesla is a legitimate business with a real product roster and a history (albeit limited) of profitability. So it’s not entirely fair to compare it to some of those internet companies that went public two decades ago with no products or sales and yet still enjoyed skyrocketing valuations.

One of the reasons for Tesla’s meteoric rise is investors’ belief that it’ll go on to dominate the electric vehicle and battery markets in the future. It may therefore be more worthwhile comparing Tesla to three firms that not only sat squarely at the center of the last great tech boom but went on to vindicate investor predictions of market dominance: Amazon, Cisco Systems, and Microsoft.

So how does Tesla’s stock-price performance over the past 12 months stack up against those of Amazon, Cisco, and Microsoft in the 12 months preceding their peaks at the turn of the millennium?

Dotcom bubble tech stocks

As you can see, Microsoft’s share price nearly doubled in the year leading up to its late-Nineties highs, while Amazon’s and Cisco’s tripled. But none of these come close to Tesa’s 700% rise over the past 12 months.

In fact, in absolute dollar terms, not a single company saw its market value increase during the dotcom bubble by as much as Tesla has over the past year. And that’s saying something: back then, the internet was new and exciting, with all sorts of unexplored opportunities for firms to make money.

While today’s growth prospects for electric vehicles look good, they’re not an entirely new product. And though Tesla may lead the market for now, it’s still got a tough road to dominance ahead amid stiff competition from established auto giants and niche upstarts alike.

Why should I care?

To show you why this matters, and to draw another parallel from history, let’s take a look at how an investor would have fared if they’d bought into those fledgling giants – Amazon, Cisco, and Microsoft – at their respective dotcom-bubble tops.

Post-bubble tech performance

In price terms, Cisco’s investors have never recovered – despite the company’s subsequent success. Amazon shareholders lost more than 90% on paper over the next two years and didn’t turn a profit for a decade, although things have admittedly been on a roll ever since. Buyers of Microsoft stock at its 1999 peak, meanwhile, had to wait 15 years to see a return on their investment.

Don’t forget that all of these companies looked as well-set for success as Tesla does now – and all of them did in fact manage to meet those expectations. Sky-high valuations, however, left peak investors nursing losses for years.

The big debate at the moment, then, is whether the wider stock market is currently experiencing the sort of bubble that occurred two decades back – with expensive, well-hyped stocks like Tesla’s among those at risk of particularly precipitous falls this time around. Personally, I do see a few signs of this.

Despite the biggest economic slump on record, companies raised $180 billion through US initial public offerings (IPOs) in 2020 – the highest annual total on record. For reference, the previous high was the $102 billion raised in 2000. What’s more, the first-day return for IPOs averaged 40% last year, the most since 1999 and 2000.

The Nasdaq 100 stock index has doubled in 24 months and currently trades at 40x next year’s average company earnings, the highest valuation level since – you guessed it – the dotcom bubble. The price of bitcoin has more than tripled inside three months, call option trading volumes are hitting new records, and the special-purpose acquisition company (SPAC) craze continues – with the latest one listing under the ticker LMAO. While stocks like Tesla’s may yet have further to run, time will tell who has the last laugh...

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