At the start of the year, I noted Tesla (NASDAQ:TSLA) as one of seven stocks about to get absolutely crushed. Put simply, this call on TSLA stock is cringe-inducing in hindsight. Since this prediction dropped on Jan. 2, shares in the leading electric vehicle maker have gained by nearly 68%.
In my defense, at the time market sentiment was in my corner. With headlines at the time discussing concerns about softening demand for Tesla vehicles, coupled with the specter of a serious 2023 recession (which would undoubtedly further curb demand), it was reasonable at the time to assume that the “Tesla bubble” would continue to deflate throughout the year.
Of course, however, this has not played out thus far. Yet while investors who faded my last take have profited greatly, my current view on this stock could prove correct in time.
TSLA Stock and Its Stunning Comeback
So, why exactly has Tesla stock bounced back in such a big way? There are numerous reasons why shares have performed so strongly during a relatively short time frame. For starters, something that was likely placing pressure during December (tax-loss harvesting) is no longer a factor.
Investor sentiment overall has improved greatly as well over the past month. With signs that inflation is cooling, and with the Federal Reserve easing on interest rate hikes, the “doom and gloom” hanging over the stock market has started to dissipate. The company also beat estimates in its latest quarterly earnings results.
But beyond these factors, the main reason why TSLA stock has made a stunning comeback is due to bullish statements made by Tesla CEO Elon Musk on the latest earnings call.
On the call, Musk indicated that demand has improved greatly since the EV maker implemented price cuts, stating that January orders were double that of production during the month.
He also hinted that the company has ways to minimize the impact of lower vehicle prices on its profit margins. With these statements, investors have become more confident that Tesla can weather the current economic slowdown, without sacrificing profitability.
Why It’s Wise to Tread Carefully
Since zooming higher post-earnings, TSLA stock has kept climbing. Further promising macro news, coupled with the upbeat outlook from other automakers, such as General Motors (NYSE:GM), has helped to reinforce the narrative that Tesla’s vehicle price cuts will help get the company, and the stock, back into the fast lane.
Still, despite this latest development, it may be wise to tread carefully. It’s far from a lock that the reported booming demand for Tesla vehicles following the price cuts will carry on through the rest of the year. Incumbent automakers like Ford (NYSE:F) have started to unleash their own EV price cuts.
As a Seeking Alpha commentator recently argued, the perception that Tesla’s competitors can’t win a price war is erroneous. If “old school” automakers slash prices, it’ll largely come at the expense of dealer margins. Legacy automaker vehicle prices are already coming down, as supply normalization means paying above sticker price is no longer the “new normal.”
Also, it may be premature to say overall EV demand will stay strong in 2023. As S&P Global argued in a recent research note, there are several risks that could still affect EV sales growth this year.
TSLA has experienced a strong bounce back due to Elon Musk providing the investing public with a much rosier outlook for the company than previously anticipated.
For this rebound to continue, Tesla needs to continue beating expectations with its delivery and financial numbers over the next few quarters. That could prove to be easier said than done, given the aforementioned factors.
Upcoming events, such as Tesla’s Mar. 1 Investor Day, could spur another big move for the stock, but an earnings/guidance letdown a quarter or two down the road could put shares back in reverse.
So, is TSLA stock a buy or a sell? It depends. Long-term holders should stay put. Those who bought in right before the big rally should lock in their fast profits. Investors who have mulled entering a position should wait for a more opportune entry point.
On the date of publication, Thomas Niel did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.