Tesla: 2 Reasons to Love Musk's $1B Buy, 1 Reason to Be Bearish
Shares of automotive giant Tesla Inc. (NASDAQ: TSLA) have surged nearly 20% over the past week, reminding investors just how quickly the stock can move when the narrative shifts. However, bulls had been scratching their heads for much of the summer.
As we recently flagged, Tesla's U.S. market share had sunk to an eight-year low, and its chart looked tired after repeated failures to break through resistance around the $360 mark.
Right as we were wondering what it would take to reignite momentum, CEO Elon Musk seems to have provided the answer. His decision to personally buy more than $1 billion worth of Tesla stock last week marks the most significant insider purchase in the company's history. It has completely reset the conversation heading into Q4.
So, what does this buy mean, and how should investors approach Tesla now? Let's break it down into two clear reasons for being bullish and one reason for staying cautious.
Bullish Reason #1: Insider Conviction at the Perfect Moment
The size and timing of Musk's buy can't be overstated. He scooped up more than 2.5 million shares, all above that sticky $360 mark, in a purchase valued at over $1 billion. It was made all the more interesting because his last significant purchase of Tesla stock was back in early 2020, when it was starting a 60% sell-off.
This latest one comes at a very similar moment when many investors have started to doubt the story. The company's U.S. market share recently dipped below 40% for the first time since 2017, European sales have been slowing, and while Tesla shares managed to break out of last month's pennant, they also failed to kick on as expected.
Musk's move tells Wall Street and the market at large that he still sees huge upside potential even if others don't.
Like corporate share buyback plans, insider conviction like this often has a powerful signaling effect. If the CEO is willing to commit personal capital of this size, it suggests he views Tesla's current valuation as extremely undervalued compared to its potential. Given how much Tesla shares gained following the update, plenty of others thought the same, too.
Bullish Reason #2: "Wartime CEO" Mode
The team over at Wedbush reiterated their Overweight rating on the stock following the update, with analyst Dan Ives saying Musk was back in "wartime CEO" mode.
Given the number of non-Tesla-specific distractions Tesla investors have had to deal with when it comes to Musk over the past year, this will be a refreshing change of pace.
Given the company needs to start doubling down on Tesla's future beyond cars, seeing Musk become laser-focused on other key investments is a much-needed tailwind.
In many ways, the insider buy provides a fresh rallying point for investors who have grown uneasy, not only with recent market share declines but also with a constantly distracted CEO. Instead, the bulls have the founder and leader doubling down with his money at a key inflection point.
Bearish Reason #1: Lofty Valuation Is a Risk
Of course, there's another side to this story. Thanks to the stock's latest jump, Tesla's price-to-earnings ratio has soared to 240, its highest in almost four years. Given that there were already concerns that this was a frothy number, massive pressure was put on the upcoming earnings report in mid-October.
The results must be exceptional to justify the recent gains and drive fresh ones. If ever Tesla couldn't afford even a modest miss, it's now. With market share slipping to multi-year lows and competitors rapidly catching up, the bears have plenty of ammunition.
In fact, Thursday's 2% drop after the recent run showed that sellers are still circling and haven't been driven off. A failure to hold onto these gains and remain above the $400 mark could spell trouble, even before October's results. But with the broader market in risk-on mode, and the major indices hitting record highs, it has to be said that the odds are stacked in Tesla's favor—for now, at least.
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