Driven by global policy and investor enthusiasm for the future of electric vehicles, Tesla quickly achieved a trillion-dollar valuation, second only to Facebook's speed.
But the market is always symmetrical, and recently, Tesla shares have fallen more than 25% from their peak, plunging into a technical bear market. Still, many analysts are betting that continued improvements in fundamentals and capacity could help Tesla regain its previous sky-high valuation.
Why the decline?
Tesla has spent relatively little time on its way to becoming a member of the trillion-dollar club, becoming the second fastest company to receive the award after Meta.
Over the past five days, Tesla's stock price has fallen 10.3 percent, below $1,000 and also below its $1 trillion market cap.
Many analysts believe Tesla's valuation is exaggerated. Even with the recent plunge in the stock price, Tesla's dynamic price-to-earnings ratio is still 307.86 times.
Peers like GM and Ford have price-to-earnings ratios of 7.64 times and 27.44 times, respectively, even though they sell more cars.
Another factor contributing to Tesla's recent decline is elon Musk exercising stock options, and he has completed 70% of his share sale plans. After selling $9.85 billion worth of stock in November, he sold another $2.87 billion worth of stock in December.
Analysts said the bulk sell-off caused the stock to face downward pressure. Musk's most recent sale was on Monday, December 13, when he sold 934,091 shares for about $906.5 million.
Macroeconomic factors are also responsible for Tesla's decline, and the Fed's expectation of raising interest rates could adversely affect overvalued stocks, as it could trigger a flow of money from capital markets to a safer broader class of assets.
Will it bounce back?
During the pandemic, Tesla's business has become stronger despite the possible deviation in the fundamentals of the stock.
It is building new manufacturing plants in Austin and Berlin. Inaugurated in January 2020, the Shanghai plant surpasses Fremont, California, in manufacturing capacity as a hub for exporting cars to Europe.
Tesla has also made progress in its self-driving trials and developed new chemical batteries.
Coupled with the global push for green cars, analysts believe the company's business fundamentals will continue to improve.
Wedbush Securities analyst Dan Ives set a price target for Tesla stock at $1400.
Ives believes that the "green wave" will bring $5 trillion in market opportunities over the next decade, and Tesla will lead the way.
Jefferies Group analyst Philippe Houchois raised Tesla's price target from $950 to $1,400 due to the acceleration of Tesla's free cash flow growth in the third quarter and its "scale" compared to most electric car brands that choose oem.
Meanwhile, Morgan Stanley's Adam Jonas is a well-known Tesla bull, who set tesla's share price target at $1200.
