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Why Tesla Stock Pulled Back Today

By Rich Smith - Aug 24, 2020 at 11:19AM

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There's a bull case for Tesla -- but also a chance reality will set in.

What happened

Tesla (TSLA 4.53%) stock has had an incredible run this year -- up 376% through Friday's close -- but even the best electric cars need to pause and recharge eventually. What's interesting about today's sell-off is that it's coming at a very strange time.

This morning, investment bank Wedbush announced it is raising its bull case price target on Tesla stock from $2,500 a share to $3,500, reports TheFly.com. And Tesla stock is down 2.5% on that news (as of 11:20 a.m. EDT)? Why?

A man examines a stock chart superimposed on a Chinese flag.

Image source: Getty Images.

So what

Perhaps it's because Wedbush's latest prediction of Tesla's stock price value seems a bit ... greedy. I mean, Tesla has trounced the stock market's performance pretty soundly, right? It has basically quintupled this year, and it's up more than eightfold over the past 52 weeks, versus an S&P 500 gain of barely 18%.

On top of that run, Wedbush's prediction of a potential $2,500 stock price already looked pretty ambitious. With the stock trading at $2,050 at the end of last week, a run to $2,500 would work out to 22% one-year growth. But that wasn't good enough for Wedbush.

Oh, no. It had to up its prediction to $3,500.

Now what

Or did it?

Consider: Calling for Tesla stock to shoot up another 71% on the back of "robust and stronger than expected" demand would seem a bit irrationally exuberant in light of last week's news that registrations of Chinese-built Teslas fell 24% in July. Predicting a "perfect storm of demand" when demand just declined would seem to fly in the face of reality.

But here's the thing you may have missed: Wedbush called its $3,500 target a "bull case" scenario -- the number Tesla stock might hit if literally everything goes right for the company. The analyst notes that a more realistic valuation for Tesla -- somewhere between the bull and bear cases, where a couple of things might go wrong -- is still just $1,900 a share, or 7% below where Tesla was trading Friday.

I suspect it's this cautionary note that is reining in investor enthusiasm for Tesla stock today.

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