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Elon Musk’s Warning On Tesla Stock Means The Current Rally Has Peaked

When a CEO thinks that his company’s share price is too high, that’s a red flag that business fundamentals won’t be able to support the market’s inflated valuation. In all likelihood, that was the message Tesla (NASDAQ:TSLA) CEO Elon Musk was sending to his devoted followers and investors when he tweeted on Friday:

“Tesla stock price is too high imo (in my opinion)”

Tesla shares tumbled more than 10% afterward, indicating that the message was received–at least by some.

TSLA Weekly TTM

TSLA Weekly TTM

But that weakness was short-lived. By the next trading day the stock had recovered, returning to where it was before Musk’s tweet. Intra-day Tuesday it traded at the $778 level, before closing at $768.21, up 0.92% for the day. As well, the stock has gained 86% this year.

The quick recovery certainly shows that there is a great momentum behind the current rally that made Tesla one of the best-performing stocks among the technology giants this year. But if history is any guide, negative comments by Musk provide a strong sell signal to Tesla investors over the longer term.

Baird Equity Research reviewed the past four incidents where Musk spoke negatively about Tesla’s stock price. In the three most recent events, shares of the electic vehicle manufacturer remained in the red one year out, while in the 2013 episode, Tesla plunged 30% during the following month. It eventually recovered over the following one-year period, according to the research, carried by CNBC.

However, there are strong indications that the carmaker has been able to turn the corner after an array of missteps in 2019. The company has been posting strong quarterly results with better-than-expected deliveries, even amid the coronavirus pandemic. That streak of better earnings reports has prompted many analysts to recently turn bullish on the stock.

Last month, Goldman Sachs recommended buying Tesla with a price target of $864 a share, among the highest on the Street. Goldman analyst Mark Delaney wrote that Tesla has a significant lead over other automakers in producing electric cars and is expected to maintain a strong market position.

Despite this optimism, it would be naive to think everything will go as planned, particularly now that the global economy has been turned upside down by the coronavirus pandemic. Currently, automobile production is shut and sales are tumbling as the economy enters a deep recession.

Which is the reason Tesla suspended full-year car delivery guidance last week. That metric had originally been targeted at more than 36% growth this year before the pandemic. The combination of slowing car sales and this quarter’s likely worse cash burn means it will be even harder to justify Tesla’s current share price.

But in general, today’s market isn’t focusing on earnings. Investors generally have their eyes on the post-pandemic world, where low interest rates will fuel another consumer boom, helping companies like Tesla.

Bottom Line

Musk’s warning about Tesla’s shares being overvalued signals trouble ahead for the company in meeting its sales targets when the economy is slipping into one of the deepest recessions seen in years. Short-term investors should take that warning as an opportunity to book profit and move to the sidelines. And for anyone interesting in buying shares, best to wait for another, better entry point.

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