Is Tesla a Bubble About to Burst?

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Given the innovative nature of Tesla, it should come as no surprise that this company is constantly in the news. This was certainly true recently, when Tesla announced that they’d bought $1.5 billion worth of Bitcoin (BTC) and intended to start accepting this as a viable payment method.

This helped to maintain a Tesla price of $863.42, continuing an exponential growth trend that began more than one year ago. Back on March 23rd of last year, a Tesla share cost just $86.86, with this nearly 10-times lower than the spike that followed the procurement of BTC.

But is Tesla gripped in a bubble, and could this be about to burst? Here’s a look at the firm’s share price performance and what we should expect through 2021.

Tesla’s Performance During the Last 12 Months

Tesla’s share price peaked at an incredible $883.09 on January 26th of this year, and until recently it maintained its position above the $800 mark.

At the same time, Tesla’s market capitalisation value soared to more than $800 billion in the 12 months up to January of this year, with this having also increased from just $78.83 billion since March 20th, 2020.

However, both of these metrics have nosedived considerably since peaking at the beginning of the quarter, with Tesla’s price embarked on a steep decline that saw it hit $563 on March 8th of this year. Although this has since rebounded to $654.87, it remains far short of the record high established just two months ago.

The same trend has impacted on the business’s market cap value, which has fallen from that peak of $800 billion in February to just $679 billion last week.

Some have also suggested that Tesla could ultimately see further share price and market cap declines through 2021, particularly as the global economy recovers and base interest rates increase across the globe.

Interest rates were slashed across the globe last year as the world’s economy contracted by 3.5% last year, but projected growth of 5.5% for 2021 will see central banks adopt a far more aggressive monetary policy.

Is Tesla in a Bubble?

Given the rapid escalation in Tesla’s market value and associated share price, the brand appears to be experiencing an economic bubble. 

The fact that Tesla’s share price rose above its intrinsic value during the last year is also indicative of an economic bubble, and this may be a cause of concern for investors. To put this into context, the automakers price-to-earnings ratio increased to 1,601 last year, with this markedly higher than the S&P 500 average of just 30.

Tesla is also part of a wider bubble within the automotive industry, with this and similar brands considered to be the long-term future for the market as a whole. 

This is encouraging investors to seek out ‘the next Tesla’ through forex brokers, in the form of emerging, small-cap stocks that will heavily influence the design of electric vehicles.

But is this bubble likely to burst? Well, economists are convinced that the brand’s share price will slump in the near-to-medium terms, in line with a falling PE value. As we’ve already touched on, this will coincide with rising interest rates and returning economic stability, while the performance of Tesla may also be influenced by the trajectory of BTC.

The good news is that even if Tesla’s bubble were to burst, the economic impact would be relatively minimal. This is because the worst bubble crashes are those funded by central banks, with stock market entities considerably less damaging over time.

Even savvy investors may not be too adversely impacted, with many now looking to short Tesla shares and profit from their gradual depreciation through 2021.

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