No, it's not what you think…. Anyone who follows the US markets somewhat would know what has happened to Tesla Inc. (NASDAQ: TSLA) stock over the past few months. Tesla shares have plummeted from nearly US$390 in August last year to reaching record lows of under US$190 this week (its lowest point since 2016).
This represents a drop of over 50% from a 52-week high to low, an incredible number!
Tesla was not too long ago a market darling over in the US and remains one of the most popular international stocks to hold for Australian retail investors (although this may have changed over the past fortnight). This experience shows how careful we as investors should be of high-flyers like Tesla.
Our local tech high-flyers – I'm looking at AfterPay Touch Group Ltd (ASX: APT), Altium Ltd (SX: ALU) and Appen Ltd (ASX: APX) have also been market darlings for the past two years. All have double (some triple) digit growth since 2017 and all have had their valuations pushed to the limit by the blue-sky above them. Appen and Altium both have P/E ratios over 60 and AfterPay doesn't even have a P/E ratio on account of its negative earnings. Is this starting to sound familiar? Well if you follow Tesla, it should. All of these companies operate in industries rife with huge growth opportunities.
But the problem is that the market has already priced this in, just like it did with Tesla in August. If one significant thing goes wrong – a missed earning, a downgrade, new regulations, another Senate inquiry – and you might be looking at a 50% drop. Markets move on fear and greed, and will easily (and quickly) swap.
Everyone knows electric cars are a 'next big thing'. Just like everyone knows machine learning, BNPL and printed circuit boards will be a big part of the future. That didn't save Tesla shareholders and it probably won't save Altium, AfterPay or Appen shareholders if these valuations are brought back to earth (for whatever reason).
Foolish Takeaway
One of my favourite Warren Buffett quotes is "price is what you pay, value is what you get". In my opinion, the prices of Altium, Appen and AfterPay are a risky bet at these levels and if you buy in, it might… just might, get you value for these companies… if everything goes right. If it doesn't, the value will get a lot better. Just not for you.
