Tesla stock is blowing another bubble. But so what?

Tesla (NASDAQ: TSLA) stock has skyrocketed by almost three-quarters since hitting a 52-week low earlier this month. To me, this suggest that shares in Elon Musk’s electric-car maker are being pumped up in a new bubble. But who cares?

Tesla stock soars in three weeks

Go back 14 months and Tesla shares were hitting all-time highs. On 4 November 2021, this hugely popular stock hit an intra-day peak of $409.97. But then tech stocks collapsed, with Tesla hit much harder than its peers.

At its 52-week low on 6 January, Tesla stock crashed to $101.81, before rebounding. Back then, I urged my wife to have a ‘punt’ on Tesla shares (buying them as a short-term trade, rather than a long-term holding).

On Friday, Tesla stock closed at $177.90, valuing the group at $562bn. The shares are now almost three-quarters (+74.7%) above their 2023 low. That’s a comeback worthy of Lazarus himself. And now I’m kicking myself that we didn’t board the Tesla bandwagon at recent lows. Urgh.

Are Tesla shares in another bubble?

Here’s how the shares have performed in the short and medium term:

One day 11.0%
2023 YTD 44.4%
Six months -40.2%
One year -43.0%
Five years 676.2%

So while Tesla stock has surged by almost 45% in January, it is down around two-fifths over six months and even more over one year. However, it’s been a knockout winner over five years, turning $1,000 into $7,676. Wow.

To me, this recent leap in the stock price suggests that Tesla shares are entering another bubble phase. But what causes a bubble? According to economist Tim Harford, writing in the weekend’s Financial Times, financial bubbles need three elements: marketability (liquidity), speculation, and cheap money.

Tesla shares are highly liquid, being a popular ‘meme stock’ that attracts tens of millions of fans. Also, the cheap money to bet on the stock comes from short-dated options — financial derivatives that magnify gains (and losses). And, as I’ve written before, Tesla options are by far the most popular among S&P 500 single-stock options.

Also, as Tesla stock rises, buying demand and trading volumes increase. This seems counter-intuitive to me. Weirdly, Tesla shares behave like (luxury) Veblen goods, becoming more desirable as they get more expensive. To me, that seems crazy, as investing in Tesla appears more like a religion than a science.

So what?

In my 36 years of investing, I’ve lived through four major crashes (September 1987, 2000/03, 2007/09, and spring 2020). I’ve learnt that bubble investing is great, until it suddenly isn’t. It’s like how an Ernest Hemingway character describes going bankrupt: “Gradually, then suddenly”. In other words, bubble investing is a rush and a thrill, until it becomes acutely painful when the bubble bursts.

Summing up, who really cares if Tesla stock has entered another bubble or not? I shouldn’t, because I don’t own these shares. Even so, I still worry about naïve investors rushing to buy into a company whose valuation defies all known logic and fundamentals. Sure, Tesla is a great stock to trade, but I wouldn’t buy it at today’s levels. While the shares defy financial gravity for now, gravity has a nasty habit of dragging things down in the end!