As Tesla (TSLA.US) stock prices continue to fall, some investors are preparing for greater downside in the future. Shares of the electric car company led by Musk have fallen about 40% from their late 2024 highs, a decline that has accelerated recently as data showed Tesla's car sales in Europe nearly halved in January. The roughly 17% share price drop this week suggests that a slowdown in Tesla's core auto business is starting to unnerve traders. That's not great news for a stock whose gains and losses depend largely on investor enthusiasm rather than fundamentals.
"The real difficulty with a stock as highly valued as Tesla is that it's difficult to call a bottom," said Steve Sosnick, chief strategist at Interactive Brokers. "Because Tesla has a long history of defying traditional valuation standards, its bottom is determined more by investor sentiment than by conventional metrics that value investors might use."
Tesla has been in trouble this year. After the U.S. presidential election, Musk's stock price continued to soar as investors bet that Musk would benefit from a close relationship with U.S. President Trump. But in January, investor confidence waned after the company reported weak fourth-quarter delivery numbers and its first annual sales decline in more than a decade. Subsequently released financial reports showed quarterly profits lower than expected, and the company lowered its sales outlook for 2025.
This week, Tesla’s market value fell below $1 trillion for the first time since November, putting it behind Berkshire Hathaway (BRK.A.US) and Broadcom (AVGO.US) in the ranking of the most valuable companies in the United States. Its stock price is just one step away from tying its longest losing streak in history.
Currently, there are few catalysts that could drive Tesla shares higher. Analysts don’t expect Tesla to make a meaningful update on its plans for fully self-driving cars anytime soon. Recently, Tesla's FSD assisted driving function was officially launched in China, with a subscription price of 64,000 yuan. However, in contrast, rival BYD (01211) said earlier this month that almost all future models will be equipped with advanced driving assistance features for free. Musk's focus on political matters has also worried investors, who want him to spend more time running the electric car maker.
Tesla's high valuation is another reason to be cautious. Tesla stock trades at a forward price-to-earnings ratio of 92 times, compared with 21 times for the S&P 500 and 28 times for Tesla's large-cap tech peers. Its recent share price declines come amid broader market weakness, with the S&P 500 down about 5% from its all-time high set this month.
Any of these factors could be the reason some investors are bracing for more volatility rather than buying the dip. One measure of options positioning - the implied skew of one-month options - turned bearish last week for the first time since November, a sign that traders are seeking protection against future share price declines. The premium options traders are paying to protect against a fall in Tesla shares is the highest since the market plunged last August.
Technical strategists who study charts to predict stock moves are equally cautious. One reason is the strength of the stock's current decline, as well as its history of wild swings.
Mark Newton, head of technical strategy at Fundstrat, expects the stock to rebound from the $275 level, which would represent a discount of about 2.5% from Thursday's closing price. He said a break below that level could see the stock further test support at $260, a level the stock hit before the election.
Granted, even the most bearish Tesla investors know that sentiment on the stock can turn around in an instant, even if the fundamentals look dire. The most recent example came during the post-election rally, when the company's stock price nearly doubled in just 29 trading days.
However, investors counting on a turnaround could be in for a tough time, said Roundhill Financial CEO David Mazza.
He said: "We expect Tesla to remain under pressure in the near term as investors weigh the benefits of Musk's 'first partner' premium against the reality that the electric vehicle business is struggling in a strategically important market. Given these conflicting narratives, it is difficult to say what the right path is for the stock."