Over the past month, Tesla (NASDAQ:TSLA) shares have fallen almost 10%. Although they’re still up more than 50% year-on-year as I write, the company has seen a sell-off that has taken most electric vehicle (EV) stocks with it, along with the NASDAQ index. I’ve known that Tesla shares are volatile for a long time, so this doesn’t concern me too much. But when I consider the long-term (five-year) outlook, I wonder whether this volatility will be positive or negative for the stock.
Key man: Elon Musk
Many people assign a good amount of the volatility to the charismatic CEO, Elon Musk. He has a history of making bold (and sometimes unsubstantiated) statements. Back in 2018, he claimed to have the funding to take Tesla private. He was later fined for this statement.
Musk uses his Twitter account to broadcast most of his views and opinions on the company. Given his influence on Tesla, investors rightly pay close attention to what he says.
So when I look out over the next few years, I think Musk will be a key factor in determining where Tesla shares will go. If he stays at the helm and pushes the business forward, this would bode well for the company. However, if he continues to reduce his shareholding and decides to put more time into other ventures (such as SpaceX), then Tesla shares might struggle. I’m not claiming that without Musk Tesla would be doomed. But from a marketing and PR point of view, Elon Musk does keep Tesla relevant.
Tesla shares driven by speculation
Another key point when considering the long-term future of Tesla shares is the retail investor base. Part of the high volatility is due to a lot of investors trading the stock for speculative purposes. What this means if I were among them is that I’d buy the stock for a day or two after positive earnings, or piggyback off a tweet by Musk. I wouldn’t have the intention of holding the stock for years, but rather to make a quick buck.
There’s nothing wrong with this, but it does make it harder to try and predict the long-term share price of Tesla. If these retail traders move to focus on other EV stocks, such as Lucid and Rivian, then momentum behind the shares could stutter.
It also makes it harder for fundamental investors like myself to be convinced. With a price-to-earnings ratio just above 300, I think I can find better value in other stocks. If this ratio returns to a more normal level in five years’ time (say sub-100), this would either require Tesla shares to fall, or earnings to substantially increase.
An uncertain future ahead
Overall, I think Tesla shares will be higher than their current levels in five years’ time. But considering that the shares are up 55% in the past year, I don’t see this same kind of explosive growth. I think the modestly higher share price will allow the fundamental value to become fairer. I also think that Elon Musk will have his eye on new projects, stunting the interest that’s driven by his Twitter account. On that basis, I won’t be investing as think I can find better plays elsewhere.
