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Stocks  | September 11, 2020

The worst one day decline ever for Tesla’s stock left bullish investors reeling and wondering what to do next. Well, buying on deep dips has been a good strategy.

Tesla stock (ticker: TSLA) fell 21% on Tuesday. In addition, it has lost one third of its value since the announcement of a $5 billion share sale on Sept. 1.

Sharesof the electric-vehicle pioneer have declined more than 10% in a single day only 19 times since the company’s 2010 initial public offering. In the three months following the declines, shares rose an average of 45%.

But there are several caveats. For starters, the sample size is small. Also, Barron’s looked only at one time frame—the three months following the drop. And there was no consideration paid to how the stock was trading going into the drop, or why the stock dropped at all.

What helped spark the decline this time were the stock sale, a snub from the S&P 500 index committee, and potentially unusual options trading by SoftBank (9984.Japan).

Then there is the fact that Tesla stock has done well over time. The company sold its first shares to the public in 2010 for $17, which is $3.40 on a new split-adjusted basis. Shares are up 100-fold since then. There have been many times when buying Tesla stock yielded above-average returns. If the returns over the next decade don’t look like the previous decade, the buy-the-dip math might not work out the same way.

There was also no consideration paid to Tesla’s valuation. Wall Street still struggles with that. Roughly one in five analysts covering the company rate shares Buy. The average Buy-rating ratio for stocks in the Dow Jones Industrial Average is about 58%. The average analyst price target is $290 a share, 16% below where the stock trades.

Bernstein analyst Toni Sacconaghi sums up the Wall Street conundrum. “We remain positive on EV adoption, and believe Tesla maintains structural advantages in branding and direct distribution,” he wrote in a Tuesday research report. “That said, Tesla’s current valuation is mind-boggling.” He has trouble getting his price target above $180 a share and rates Tesla stock Sell.

Sacconaghi’s $180 target would value Tesla at roughly $170 billion, putting it second globally behind Toyota Motor (TM).

Valuation, for Wall Street traders, is a long-term concern. Daily and even monthly moves are driven by other factors. Looking ahead, Tesla’s battery technology day on Sept. 22 will be the next big event to potentially drive the stock.

Shares rebounded Wednesday, closing up 10.9% to $366.28. The average one day gain for Tesla stock following a big dip has been about 3% on average.


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