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Tesla Briefly Led the Nasdaq to New Heights. Here's Why It Didn't Last

By Daniel Foelber and Howard Smith – Jan 6, 2022 at 5:57AM

Key Points

  • Growth could slow as the Fed pulls back purchasing Treasury bonds and mortgage-backed securities.
  • New factories and what's expected to be another record year are good long-term signs for Tesla.
  • Tesla is getting ready for its next leg of production growth, and the market is a leading indicator. 

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A big tech stock sell-off is pulling down the Nasdaq and S&P 500.

On Monday, a sea of green glossed over the U.S. stock market as the S&P 500 (^GSPC 0.66%) set a new all-time high. Tesla (TSLA 2.93%) surged over 14%, and waves of euphoria overpowered fears of slowing growth and a prolonged pandemic. Wednesday brought a very different tune, as the Nasdaq Composite (^IXIC 0.05%) suffered its worst single-day drop in months and turned negative for the year after the U.S. Federal Reserve indicated interest rates could rise faster than expected.

Here's the latest on Tesla, electric vehicles (EVs), and the pros and cons that could impact the industry next.

A person wearing a denim jacket smiles and looks up.

Image source: Getty Images.

A heavyweight in the U.S. stock market

Daniel Foelber: With a market cap of $1.2 trillion as of Monday's close, Tesla stock can really move both the S&P 500 and the Nasdaq. In fact, the S&P 500 has a market cap of roughly $40.4 trillion and the Nasdaq has a market cap of around $25.6 trillion, meaning that Tesla's $144 billion market cap gain on Monday contributed around a 0.36% return to the S&P 500 and a 0.56% return to the Nasdaq. The fact that a single company can move two of the largest and most followed indexes by that much in a single day is a testament to how large Tesla has become.

To grow from here, Tesla must maintain its industry-leading operating margin and torrid top-line growth rate. It's a lot to ask an automaker to maintain high profitability as it releases lower-priced vehicles. For example, Honda Motor, Volkswagen, General Motors, Ford Motor Company, and even Toyota tend to pocket less than $0.10 on the dollar in earnings before interest and taxes. By comparison, Tesla had an operating margin of 15% for the third quarter. The full-year 2021 numbers aren't out yet, but there's a good chance Tesla will finish the year as the most efficient automaker when it comes to converting sales to earnings.

Even if Tesla continues growing at a fast clip, it will eventually need to bridge the gap between its market cap and its earnings, as evidenced by its price-to-earnings ratio. Mega-cap tech stocks like Microsoft and Meta Platforms have helped to lead the Nasdaq higher in recent years because they are fast growers, generate a lot of positive free cash flow, and are incredibly profitable businesses. Tesla could very well continue to contribute to Nasdaq gains in the future. But it's going to have to push its already high bar even higher.

Hitting its stride

Howard Smith: Tesla stock may have grown to be well overvalued by traditional metrics, but its business has grown along with it. Tesla closed 2021 with nearly 1 million vehicles delivered. And with two new Gigafactories under construction in Texas and near Berlin, Germany, respectively, it could have the capacity to produce 2 million vehicles by the end of 2022. 

With capacity looking to double in another year, and market demand far outstripping supply, Tesla's business looks like it could just be hitting its stride in the next year or two. As investors and the market are forward-looking, there's good reason to think that Tesla could still lead the Nasdaq higher next year. 

After an exponential jump in 2020, Tesla shares have increased a little more than 60% in the last 12 months. That came as production and revenue continued to move steadily higher, as seen below. 

Metric 2021 2020 2019
Total deliveries 936,172 499,550 367,500
Total revenue

$50+ billion*

$31.5 billion $24.6 billion

Data source: Tesla financial statements. *Estimate. 

With its rate of production expected to double in another year, and no lack of demand in sight, the stock doesn't necessarily have a short-term downside. In a note to clients, widely followed Wedbush Securities analyst Dan Ives recently reiterated his firm's $1,400 price target on Tesla shares, according to EV news site Electrek. That would represent another 22% rise in Tesla stock from its recent price. And Ives believes there's an even more bullish case for shares to reach $1,800.

As long as demand continues to soar -- and there's no reason to think otherwise right now -- Tesla could keep pulling the Nasdaq higher. While competition is progressing, it will take years for any new players to match Tesla's production capacity. Unless Tesla's internal operations stumble, or there is an unexpected slowdown in demand for EVs, Tesla's stock is set to keep heading skyward. 

A tall order

Tesla stock is still up year to date, but it can't move the Nasdaq alone. Wednesday's sell-off saw big names like Meta Platforms, Microsoft, and Alphabet all fall between 3% and 5%. Nvidia, Salesforce, and Adobe all dropped between 5% and 8%. Tesla's size and leading position in the red-hot electric car industry have influence, but it's going to take a lot more than just Tesla for the Nasdaq to continue beating the S&P 500 and the Dow Jones Industrial Average in the years to come.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Daniel Foelber has no position in any of the stocks mentioned. Howard Smith owns Microsoft and The Motley Fool owns and recommends Alphabet (A shares), Alphabet (C shares), Meta Platforms, Inc., Microsoft, Nvidia,, Tesla, and Volkswagen AG. The Motley Fool recommends Adobe Inc. The Motley Fool has a disclosure policy.

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