Can Tesla Bounce Back?

The world's largest EV maker has experienced a histrionic drop in its share price as its mercurial CEO faces controversies, but has it hit rock bottom?

Careful What You Wish For

Tesla has plummeted more than 40% this year, its worst close during the latest rout just over a week ago. While Tesla is not alone in turning negative, its fall has been dramatic and noteworthy. Once a leader among the "Magnificent Seven" tech stocks riding the AI boom and pulling entire indices higher, Tesla is by far the worst performer of the Seven. Notably, traders initially welcomed CEO Elon Musk's close relationship with former President Donald Trump after the election in November. However, the share price of Tesla erased all gains since the election.

Musk's affiliation with Trump, along with his prominent role in the Department of Government Efficiency (DOGE), has made him – and, by extension, the company he runs and holds a substantial stake in – a political target. Tesla dealerships have faced firebombings, vehicle owners have found their vehicles vandalised, and celebrities have publicly announced their decision to abandon Tesla in favour of other brands. It appears that the brand's popularity has reached an all-time low, with a considerable – and widening – gap depending on political affiliation, in a reversal of the Bud Light controversy from a couple of years ago.

Can It Turn Around?

While Musk's political woes provide ample fodder for attention-grabbing headlines, Tesla remains fundamentally a tech company, and investors still prioritise the bottom line. News related to the company's sales profile and income outlook remains the primary driver of the stock, and with a P/E ratio still over 100x, it still has one of the highest valuations among tech firms. This makes it more vulnerable to a shift to risk-off sentiment that has characterised the markets lately. The share price suffered substantially on Monday after rival BYD announced new fast-charging technology that would allow a full charge in a time similar to filling a gas tank. Then, the company soared just two days later after California approved limited ride-hailing.

The latter aspect might be the key to a potential rebound in the stock price. Long-term Tesla investors do not view it as a car company (and are therefore not perturbed by short-term fluctuations in sales) but rather as a tech company with valuable AI capabilities. The anticipated roll-out of robotaxis, full self-driving capability, and the development of Optimus are predicted to provide significant future revenues. In the meantime, the company still needs to keep selling vehicles, and it might be facing a snag there.

According to press reports, Tesla might sell only 359K units in Q1, a dramatic drop from the 496K reported in the prior quarter. The company is facing political backlash in the US, and its sales have reportedly been floundering in Europe, where Trump's policies are particularly unpopular, and in China. Tesla registrations in Europe have dropped 45% compared to the prior year and 12% in China. However, this lowers the bar for the first quarter, making it easier to beat expectations when it reports delivery numbers in the first days of April – the real test of how Musk's antics and market perceptions have affected the company.

V-Top Signals Downside

Tesla formed a V-top pattern at the initiation of the declines, suggesting a likely continuation towards the first pullback swing of $165 prior to the V-top rally, which started at $150. However, losing this bottom may signal further downside risks. On the upside, a correction remains likely before reaching the swing target, with $270 and $300 in play. For the bottom to be in, only a move past the 50% Fibonacci retracement of the downside leg starting at $490 would shift chances for continued upside.

Source: SpreadEx / Tesla

Key Takeaways

Tesla has declined over 40% this year as CEO Elon Musk was caught in political controversies, but investors remain focused on fundamentals and expect future revenues from AI capabilities. However, the company's valuation remains high, making it susceptible to risk-off sentiment. Tesla also faces challenges in sales, with drops in Q1 deliveries in the US, Europe, and China. Although a correction is likely, the V-Top pattern points to short-term downside risks unless TSLA moves past the 50% Fibonacci retracement.