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:

Visa ‘s Diagonal Pattern Can Mean a Top is Forming

Visa has been a wonder to behold almost since it went public at $17.25 in March 2008. True, the following twelve months surely must have scared many shareholders, but the ones who stayed have been generously rewarded. Since the bottom in 2009, Visa stock is up over 2000% and that is without counting the dividends.…

Read More »

NYSE Operator Can Fall 50% as Correction Begins

Exchanges don’t exist in a vacuum. There are companies whose entire operation is dedicated to running them. We recently wrote about CBOE Global Markets – the company operating, among others, the Chicago options exchange. Today, we would like to examine another major company in the field – Intercontinental Exchange Inc. – the company owning the…

Read More »

Lululemon Stock Can Add ~30%. Then It Can Halve

Lululemon has gone a long way since its July 2007 IPO. Investors brave or lucky enough to have bought after its 93% collapse during the 2008-2009 Financial crisis and stayed the course have made a real fortune. in September 2020, LULU stock was just pennies away from the $400 mark. Although it dropped by a…

Read More »

Disney Stock Bulls Play With Fire Above $200 a Share

2020 was shaping up to be a disaster for Disney shareholders. Not only did the COVID-19 selloff cause a 48% plunge in the stock price, but the indefinite closing of cinemas worldwide crippled Mickey Mouse’s business operations. The company’s Disney+ streaming offering came to the rescue, but still could not prevent the company from posting…

Read More »

Snap Stock Bouncing Off Fibonacci Support

It took over three years for Snap Inc., the company behind the popular app Snapchat, to reach its IPO valuation. After reaching almost $29.44 on its second day of trading in March, 2017, SNAP stock fell as low as $4.82 in December 2018. On the other hand, investors bold enough to buy near those lows…

Read More »

Rapid7 Doubles As Elliott Wave Setup Bears Fruit

We first wrote about Rapid7 in late-August 2019. The stock was hovering above $55.50, but the structure of the post-2016 uptrend suggested a notable decline was in progress. In March 2020, it fell to $31.34, down 52.5% from its all-time high. A month later, with RPD still below $47, we shared our bullish stance on…

Read More »

PNC Financial – Elliott Wave Analysis Works Yet Again

Earnings at PNC Financial suffered last year along with the entire financial sector. Net income before extraordinary items came in at $2.95B in 2020, down from $5.35 in 2019 for a 45% reduction. In our opinion, amid the biggest crisis since the Great Depression, the fact that PNC and its peers even managed to stay…

Read More »

More analyses