close icon

Tesla: Elliott Wave Aside, This is Totally Irrational

Tesla is up over 13% in pre-market trading today after news of its scheduled inclusion in the S&P 500 index on December 21st. The stock’s phenomenal rise since the COVID-19 crash led the company to a market cap of over $400 billion. This makes it much bigger than established rivals such as Volkswagen, Toyota and Audi, not to mention Ford and GM.

The way investors treat Tesla stock is similar to the way Bitcoin was treated back in 2017. Some say the company is revolutionary, while others say it is a bubble. Well, we think it is both.

Tesla and its charismatic CEO almost single-handedly forced other auto-makers to take EVs seriously. Electric vehicles were dismissed as a joke by the big auto companies 15 years ago. Now, every major manufacturer is investing billions in their own EV projects. His other companies aside, SpaceX and Tesla make Elon Musk probably the greatest visionary of our time.

Taking Investors’ “Animal Spirits” into Account

The problem is that Tesla’s market cap is twice as big as Toyota’s, while its revenue is ten times smaller. The market is forward-looking, but in that case we think it is picturing an impossibly rosy future. Since we think we cannot rely on reason when it comes to Tesla, we need a tool that takes emotion into account. That is where Elliott Wave analysis comes to the stage.

Elliott Wave analysis of Tesla stock chart

The chart above reveals TSLA’s spectacular surge since June, 2019, when its current cycle began. The rise from $35.40 to $502.49 can be seen as a five-wave impulse, whose wave 5 is still missing. The pattern is labeled 1-2-3-4 so far. The five sub-waves of wave 3 are also visible and wave 4 is an a-b-c-d-e triangle correction. Given today’s pre-market rally, it seems that a new record in wave 5 is only a matter of time.

Unfortunately for the bulls, the theory states that a three-wave correction in the opposite direction follows every impulse. So, instead of celebrating the new all-time high, investors should brace for a major bearish reversal. Targets near $600 a share seem plausible, before the bears drag Tesla back to the support of wave 4 near $350.

Tesla is Overvalued Even in a Best-Case Scenario

In fact, even at that price, the company would still be extremely overvalued. Let’s assume Tesla does everything right and reaches Ford’s sales one day. Let’s say Tesla’s revenue climbs to $150 billion and the company has a 15% profit margin. By the way, even in a strong year, none of the leading car-makers has a 15% profit margin.

So, under this scenario, Tesla makes a $22.5B after-tax profit per year. This makes it the most profitable car company in the world ever. Now, let’s attach a P/E ratio of 15 to those profits, which is still higher than the average for the auto industry. $22.5B times 15 gives us almost $340 billion for the entire firm. It turns out that even in the best-case scenario, Tesla cannot justify its current valuation of over $400 billion. Besides, it now faces fierce competition from companies with much deeper pockets.

We, at EWM Interactive, are big fans of Elon Musk and everything he does. For the sake of humanity, we strongly hope he succeeds. However, in order for investors to be successful, they cannot allow their sympathies for someone to dictate their capital allocation decisions. The truth is that no trend lasts forever, no matter how much you root for it to continue. Reality always strikes back, eventually. Tesla will be no exception.

Similar Elliott Wave setups occur in the Forex, crypto and commodity markets, as well. Our Elliott Wave Video Course can teach you how to uncover them yourself!

Stay informed with our newsletter

Latest Elliott Wave analysis on different topics delivered to you weekly.

Privacy policy
You may also like:

GameStop Stock Can Lose 40% Short-Term

GameStop Corp., once the larger video game retailer, has been losing ground in recent years. The switch to e-commerce and direct-to-consumer trends led to a steady decline in GameStop’s sales. The intruduction of cloud-gaming is only adding to the company’s problems. On that backdrop, it is not surprising that the stock has been in a…

Read More »

Biogen, Elliott Wave and the Quest for Alzheimer Cure

Biogen is one of the top-notch firms in the biotech space. With sales of over $12.7B in 2019, the stock has been very generous to investors in the past. In fact, it is one of only five companies mentioned in Christopher W. Mayer’s book “100-Baggers” that have returned 100 to 1 in under six years.…

Read More »

Ryanair Stock, Unlike Its Planes, Can Fly Again Soon

Few industries have been hit harder by the COVID-19 pandemic restrictions than the airlines. Flight numbers and passenger traffic have been significantly reduced in Europe and the U.S. since March. Even low-cost carriers like Ryanair were not spared. Ryanair’s passenger traffic plunged by 99.5% in May and is still down 64% in September. Apparently nobody…

Read More »

General Mills Bearish Elliott Wave Cycle Spells Trouble

The last time we wrote about General Mills stock was over a year and a half ago. Following a bullish reversal Elliott Wave analysis helped us correctly predict in late-December 2018, the stock was trading above $51 a share in late-March 2019. It was a 33% recovery, whose structure, however, didn’t look quite as anticipated.…

Read More »

Fortinet Is Strong, but The Stock Can Slide 40% Anyway

Fortinet Inc. provides cybersecurity solutions to large and small businesses and enterprises. The company went public on the NASDAQ exchange in late-2009. Great timing, as it allowed it to enjoy the phenomenal post-crisis bull market. In fact, by July 2020, FTNT stock was up 794% since its IPO, easily beating the S&P 500’s return over…

Read More »

NIU Stock, Down 18% This Week, Can Fall Further

E-scooters have been all the rage in the past couple of years. Much friendlier to the environment and often more convenient as an urban transportation option than cars, electric scooters were quick to gain popularity. Niu Technologies, a Chinese manufacturer, has been bearing the fruits of this trend. The company’s ADS trade on the NASDAQ…

Read More »

Barry Callebaut Can Drop 25% as Fourth Wave Unfolds

Barry Callebaut AG is one of the largest cocoa processors and chocolate manufacturers in the world. Formed by the 1996 merger of Callebaut and Cacao Barry, the company produces over two million tonnes of cocoa and chocolate per year. Barry Callebaut went public on the SIX Swiss Exchange in 1998 and has been quite rewarding to investors ever since.…

Read More »

More analyses