It has been a tough year for the stock market. Meanwhile, we have done pretty well here at Top Gun Options. As we often say, you need to trade the market that you have and not the market that you want. So, by taking sniper shots or riding trends we potentially print money in any market. In general, the market is doing poorly because of inflation, late but now sustained rate increases by the Fed, and worries about a Fed overshoot and recession. Superimposed on this background are events like the FTX collapse with charges of long-term fraud, Amazon.com making history as the first company to lose $1 trillion in market cap, and Tesla following not so far behind as Elon Musk has gone off on a tangent, bought a social media company for $46 billion, is selling shares of Tesla and taking on Tesla debt, and picking fights with just about everyone on his whole owned social media platform. All of this may be great for Mr. Musk’s ego but we wonder how to trade Tesla post Musk Twitter takeover.
Tesla Has Not Been So Cheap for Years
While Tesla has lost a ton of market cap, shares are still selling around $150 a share. That is down from $194 a share at the start of the month, $309 a share three months ago, and $399 at the start of 2022. While the stock is certainly not back in the $20 range where it was three years ago its PE ratio is the lowest in the last two and a half years. Folks stuck with Tesla for years because they believed that electric vehicles would take over the auto markets, that Tesla would lead the charge, and that Elon Musk would provide the best possible leadership for the company. Afterall, this guy led SpaceX to dominance, brought Tesla from obscurity, and seemed to do no wrong. Then he got fixated on Twitter.
How Does Twitter Make a Difference to Tesla?
For years Tesla was a story stock. They made a nice electric car but not many of them and were not making money. Then they fixed production issues, started turning out lots of vehicles, and convinced the investing world (that was not already in love with them) that they were for real. Their PE ratio went from zero at the end of March 2020 to 512 at the end of June 2020 to 806 at the end of September 2020 to 1102 at the end of 2020. It slid down during 2021 but ended the year at 215. Now it is ending 2022 below 50 and the last part of the slide has come with a dramatic fall in stock price. Certainly a falloff in demand for electric vehicles in China has hurt Tesla but US car sales are up. The difference seems to be that investors are concerned about their previously infallible leader (Musk), ranting on social media, doing wholesale firing, ticking off advertisers, and not seeming to pay attention to business at Tesla. It has gotten to bad that NASA has voiced concerns about Musk and management of SpaceX which has become integral to America’s rocket and space efforts. Add the fact that Musk paid way too much for Twitter, might just be running it into the ground, and appears to be bleeding off his wealth in Tesla to pay for his Twitter folly.
Tesla in the Short vs Long Term
It looks like electric vehicles are really the wave of the future. Tesla will end up ceding market share percent as other automakers catch up, but the electric vehicle market will grow so much that Tesla still has huge potential. Over the short-term market sentiment is being driven by every tweet, firing, and other bit of shenanigans coming out of Musk and Twitter. Just by looking at Tesla stock over the last six months one can see enough dramatic ups followed by worse downs to make any option trader happy. It is a fair guess that until Musk fixes his Twitter mess and is seen to get back to business running Tesla (and SpaceX) stock prices will likely trend downward with enough volatility to make option trading profitable.