After Falling 65% in 2022, Tesla’s Stock Remains Overvalued. It Still Might be Time to Buy.

Tesla's share price is down 65 percent this year. To appease angry investors, Elon Musk said he will find a new CEO for Twitter and shift his attention back to Tesla.

Tesla stock
Tesla’s stock price is down 40 percent since Elon Musk bought Twitter. Karol Serewis/SOPA Images/LightRocket via Getty Images

Elon Musk’s chaotic management of Twitter has damaged investor sentiment around Tesla (TSLA), causing the electric carmaker’s share price to sink in recent weeks. Tesla shareholders say the stock rout reflects investors’ growing frustration over Musk’s preoccupation with Twitter, while Musk largely deflected the criticism, blaming macroeconomic factors.

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On Dec. 20, Tesla stock fell 8 percent to $138, its lowest point in 12 months. So far this year, Tesla shares have plunged 65 percent, far exceeding Nasdaq’s 32 percent decline and the S&P 500’s 19 percent drop. In an apparent move to appease investors and boost market confidence, Musk said on Dec. 20 he will step down as Twitter’s CEO as soon as he finds a replacement. He suggested in a tweet today (Dec. 21) now is a good time to buy Tesla stock since it has fallen so much.

Tesla shares barely moved after his announcements and closed 0.4 percent higher at $138.3 today.

It’s difficult to say whether Tesla’s plummeting price means it is truly a value stock by now because rarely has its valuation reflected financial common sense. Before its fall this year, Tesla’s share price had been on a meteoric trajectory for two years, skyrocketing 800 percent in 2020 and 50 percent in 2021, giving the electric carmaker a price-to-earnings (P/E) ratio of 190 at the end of 2021, a sign that the stock is extremely overvalued.

P/E ratio measures a company’s current share price relative to its actual earnings per share. The higher a company’s P/E ratio is, the more overvalued it tends to be. Tesla’s latest P/E ratio is 38—much more reasonable than the 190 this time last year but still nearly double the average P/E ratio of S&P 500 companies (which includes Tesla) of 20.

Among major tech companies, Apple has a P/E ratio of 22 and Google’s is 25. Automakers tend to have an even lower ratio—General Motors’ current ratio is 6, Ford’s is 7.2—making Tesla even a bigger anomaly.

Why analysts expect Tesla’s share’s to rebound

Nevertheless, some analysts expect Tesla stock to rebound soon, based on both financial models and Musk’s promise to shift attention back to Tesla.

Gary Black, a major Tesla investor and cofounder of the Future Fund, an exchange-traded fund, predicts Tesla’s share price will rise four-fold, to $550, in six to 12 months, based on his calculation using the capital asset pricing model (CAPM), a formula commonly used in finance to estimate the future return of a stock.

Despite being a nearly 20-year-old company, Tesla has been profitable for only three years. With new factories entering production around the world and various new projects underway, many investors expect Tesla’s profit to grow significantly. Expectations of revenue and profit growth are often bigger drivers of a company’s stock price than actual earnings data.

In a series of tweets today, Black listed a number of things that could boost Tesla’s share price in the short term, including the appointment of a new Twitter CEO, Tesla’s upcoming quarterly results, announcements of new Tesla factories in the U.K. and North America, and the anticipated releases of Tesla’s new self-driving software and Cybertruck, its hyped electric pickup.

Part of the reason for Tesla’s massive selloff this year is Musk himself, who has cashed out about $7 billion worth of Tesla shares since he bought Twitter in October. In November, Musk told Twitter employees he sold Tesla shares to “save” the financially fraught social media company. That is also expected to stop soon because Musk said during a Twitter Spaces event on Dec. 20 Twitter could break even in 2023.

Musk announced his intent to step down as Twitter’s CEO following a poll he started on Dec. 18 asking his 122 million followers whether he should resign. The poll ended on Dec. 19 with 57.5 percent of participants voting for his ouster.

“Finally a good step in the right direction to end this painful nightmare situation for Tesla investors,” tweeted Dan Ives, an Wedbush analyst covering Tesla, on Dec. 20.

After Falling 65% in 2022, Tesla’s Stock Remains Overvalued. It Still Might be Time to Buy.