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Damning Report Says Tesla is Bubble Due for Big ‘Technical Correction’

Damning Report Says Tesla is Bubble Due for Big ‘Technical Correction’
  • The Financial Crisis Observatory’s latest report identifies Tesla as a bubble.
  • The FCO says a market correction is inevitable.
  • The overvaluation has been driven by Elon Musk’s popularity and inspiring technology.

Tesla (NASDAQ:TSLA) is a bubble. A cult of personality surrounding Elon Musk, as well as utopian promises of future tech, have inflated its price beyond all reason.

No, this isn’t some biased naysayer talking. It’s the Financial Crisis Observatory, with its Global Bubble Status Report. On Friday, it concluded that Tesla is one of the biggest bubbles you can find on the stock market. And ominously for investors, it also warned that this bubble will burst very soon.

Weak Fundamentals

A collaboration between ETH Zurich and Swiss market research firm Systematic Investment Management, the FCO publishes a global bubble report every month.

Well, look away now Tesla supporters because the FCO’s report for February identifies TSLA as hugely overvalued and waiting to burst:

Weak fundamentals, high valuation and lots of exciting good news: it is a typical Dotcom-like bubble and very dangerous for short-sellers.

The FCO awards Tesla a “Bubble Score” of 85.9%. This ranks among the highest of 823 stocks it analyzes across the S&P 500, Nasdaq 100, and Stoxx Europe 600. Basically, this means Tesla is grossly overvalued compared to its fundamentals, such as cash flow and return on assets.

In fact, the FCO also gives Tesla a “Value Score” of only 1.7%, the lowest in its report. Translated into English: Tesla is likely to provide a very low return on investment in relation to its underlying enterprise value.

The FCO identifies Tesla as having entered a bubble phase in September. | Source: ETH Zurich and Systematic Investment Management AG

In other words, Tesla is very much a bubble. And the report spells this out in words as well as figures:

Tesla’s annual reports are not satisfying conventional institutional investors for valuation purposes but retail investors are attracted by its revenue & earnings growth and the fancy storyline and, therefore, flood in.

Elon Musk, Banjo Player

For the FCO, Elon Musk is the main reason why Tesla is such a bubble. Its price isn’t the result of a financially strong company. Rather, it’s the function of a “clever CEO with many creative marketing strategies.” Musk “knows how to catch the eyes of the media,” according to the report’s authors.

Indeed, Musk plays the media like a banjo. From cryptic tweets to “dad-dances” and claims of taking Tesla private, the entrepreneur does something almost every week to seduce media attention. This, according to the FCO, has been one of the two main reasons for his company’s dizzying climb.

The other main reason is the inspirational nature of Tesla’s products. By targeting the future with AI-driven electric cars, Elon Musk and Tesla capture the public’s imagination:

As the dragonhead of the Electrical Automobile companies, Tesla has persuaded many people that it is a new “Apple” of the coming decade and all other petrol-fuel mechanical car companies are just like “Nokia”.

In turn, this ambition attracts mostly clueless retail investors. People who naively assume “new technology” automatically equals “big bucks.” Well, it doesn’t (just ask the vast majority of dot-com companies). And to make matters worse, the FCO concludes by warning that Tesla’s stock bubble will burst very soon.

Thus, a technical correction is inevitable. When a correction will be coming, the sky-high valuation of Tesla (lack of reasonable fundamentals to justify the price) will become the last dagger to sting the foam.

The Bigger They Are, The Harder They Fall

Early warning signs are already emerging. Tesla’s stock fell by more than 10% on Wednesday, fed by fears surrounding Chinese production.

Tesla’s market cap rose to an all-time high of $160 billion, before falling by 10% on Wednesday. | Source: Yahoo

If future company performance fails to reach the highs Musk has promised (e.g. 500,000 vehicle delivers by the end of 2020), it could witness more falls in the future.

So think very carefully before you join the Elon Musk and Tesla bandwagon.

Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com.

This article was edited by Sam Bourgi.

Last modified: February 7, 2020 4:30 PM UTC

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