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Tesla (NASDAQ:TSLA) shareholders are well aware that the share price is quite volatile. Last week provided more evidence of this, with Tesla stock jumping 11%. Events during this period have provided some excitement for the direction of the business going forward, but investors need to be aware of the risks before thinking about making up their minds.
Big numbers thrown around
One factor driving the move was the fact that Tesla’s board proposed a $1trn incentive stock option package for Elon Musk. In case you had to read that number again, it’s correct, $1trn!
This is tied to very ambitious performance milestones (including large growth in earnings, valuation, production scaling). Yet it’s a clear signal that the board is doubling down on Musk’s continuation as CEO and expects big things from his leadership. Investors tend to respond positively to such packages when the CEO is perceived as central to future growth, hence the move in Tesla stock as a result.
The stock also benefitted from broader enthusiasm in the market about an imminent interest rate cut. This is with reference to the meeting this week of the Federal Reserve. The expectation (or hope) that the Fed may begin easing interest rates helps high-growth, high-valuation stocks like Tesla. After all, it reduces the cost of debt, which often fuels high-growth stocks. Tesla sells a lot of cars on finance packages, so lower interest rates make the rates more appealing.
A continued rally
There was positive news out of Germany on Sunday (14 September). Tesla’s factory at Grünheide plans to ramp up production for the rest of 2025 due to stronger sales. That suggests demand is holding in at least some key European markets. This could offset some negative sentiment in this area.
On Wednesday, if we do see the Fed indicate more interest rate cuts are on the horizon, it could help to push the stock even higher.
These factors could support a jump in Tesla shares, but it’s essential to consider some risks that remain present. The business is currently facing lawsuits in multiple cases related to its autonomous driving features. For example, there’s been at least one large jury verdict worth over $250m tied to a fatal crash involving Autopilot.
It’s also facing higher competition from EV makers around the world. Particularly in China, lower-cost EVs are eating into demand for Tesla’s premium models. This could become a much larger problem if action isn’t taken fast.
The bottom line
The move over the past week was strong, but ultimately, I think some problems still need to be addressed for Tesla. The stock is up 71% over the past year, with the price-to-earnings ratio back above 200. I think there are better shares with more attractive valuations to be found right now, so I’m looking at alternatives rather than buying Tesla stock right now.
