Is Tesla the Meme Stock of Yesteryear?

For years, Tesla stock charged ever-higher despite weak operating results. So far in 2021, that pattern has reversed itself.

Second-quarter results from Elon Musk’s auto maker were the company’s strongest on record. Tesla booked US$11.9 billion in sales and earned $1.1 billion in quarterly profit according to generally accepted accounting principles. Both figures topped analyst expectations. And while Tesla sold $354 million of regulatory credits to rivals, the auto maker would have easily finished the quarter in the black without them. Results were flattered by Tesla receiving certain goods and services from suppliers for which it hadn’t yet been charged, but Mr. Musk still deserves credit for that strong performance.

Tesla managed to deliver more than 200,000 cars in the quarter despite the global semiconductor shortage. And the falling price of bitcoin, which the auto maker carries on its balance sheet for some reason, only resulted in a $23 million hit to the bottom line.

But while Tesla’s actual business has lately come of age, the stock isn’t playing along. It was slightly higher on Tuesday morning, had dropped 9% so far this year and is down by more than a fifth over the past six months, lagging bigger rivals like Ford and General Motors. Meme stock aficionados, who couldn’t get enough of Tesla until recently, seem to have moved on to cryptocurrencies, brick-and-mortar video-game retailers and movie-theatre chains.

One reason: Tesla’s excellent results underscore how disconnected its valuation is from business reality. Tesla has earned $1.41 a share so far this year. If the auto maker continues to shine in 2021, it might earn $4 a share on a GAAP basis. At the current stock price, the company is valued at more than 150 times that still-hypothetical earnings figure—orders of magnitude higher than any comparable rival.

And the news wasn’t entirely positive on Monday: Tesla said its semitrailer truck, which Mr. Musk first showed to the public in 2017, wouldn’t begin production until next year. Given Tesla’s decade-long track record of overpromising on timelines, investors shouldn’t be expecting even this new guidance to hold up.

Meanwhile, rivals such as Ford, General Motors and Volkswagen are developing electric offerings of their own. And startups, including Lucid Motors, give investors more options to speculate on an electrified future.

Tesla seems to have put its most turbulent days behind it. That doesn’t preclude a bumpy ride for its shareholders in the future.

President Donald Trump’s imposition of tariffs on trading partners have moved analysts to reduce forecasts for U.S. companies. Many stocks look vulnerable to declines, while some seem relatively immune.

Since the start of the year, analysts’ expectations for aggregate first-quarter sales of S&P 500 component companies have dropped about 0.4%, according to FactSet. The hundreds of billions of dollars worth of imports from China, Mexico, and Canada the Trump administration is placing tariffs on, including metals and basic materials for retail and food sellers, will raise costs for U.S. companies. That will force them to lift prices, reducing the number of goods and services they’ll sell to consumers and businesses.

This outlook has pressured first-quarter earnings estimates by 3.8%. Companies will cut back on marketing and perhaps labour, but many have substantial fixed expenses that can’t easily be reduced, such as depreciation and interest to lenders. Profit margins will drop in the face of lower revenue, thus weighing on profit estimates. The estimates dropped mildly in January, and then picked up steam in February, just after the initial tariff announcements.

“We are starting to see the first instances of analysts cutting numbers on tariff impacts,” writes Citi strategist Scott Chronert.

The reductions aren’t concentrated in one sector; they’re widespread, a concrete indication that the downward revisions are partly related to tariffs, which affect many sectors. The percentage of all analyst earnings-estimate revisions in March for S&P 500 companies that have been downward this year has been 60.1%, according to Citi, worse than the historical average of 53.5% for March.

The consumer-discretionary sector has seen just over 62% of March revisions to be lower, almost 10 percentage points worse than the historical average. The aggregate first-quarter earnings expectation for all consumer-discretionary companies in the S&P 500 has dropped 11% since the start of the year.

That could hurt the stocks going forward, even though the Consumer Discretionary Select Sector SPDR exchange-traded fund has already dropped 11% for the year. The declines have been led by Tesla and Amazon.com , which account for trillions of dollars of market value and comprise a large portion of the fund. The average name in the fund is down about 4% this year, so there could easily be more downside.

That’s especially true because another slew of downward earnings revisions look likely. Analysts have barely changed their full-year 2025 sales projections for the consumer-discretionary sector, and have lowered full-year earnings by only 2%, even though they’ve more dramatically reduced first-quarter forecasts. The current expectation calls for a sharp increase in quarterly sales and earnings from the first quarter through the rest of the year, but that’s unrealistic, assuming tariffs remain in place for the rest of the year.

“The relative estimate achievability of the consumer discretionary earnings are below average,” Trivariate Research’s Adam Parker wrote in a report.

That makes these stocks look still too expensive—and vulnerable to declines. The consumer-discretionary ETF trades at 21.2 times expected earnings for this year, but if those expectations tumble as much as they have for the first quarter, then the fund’s current price/earnings multiple looks closer to 25 times. That’s too high, given that it’s where the multiple was before markets began reflecting ongoing risk to earnings from tariffs and any continued economic consequences. So, another drop in earnings estimates would drag these consumer stocks down even further.

Industrials are in a similar position. Many of them make equipment and machines that would become more costly to import. The sector has seen about two thirds of March earnings revisions move downward, about 13 percentage points worse that the historical average. Analysts have lowered first-quarter-earnings estimates by 6%, but only 3% for the full year, suggesting that more tariff-related downward revisions are likely for the rest of the year.

That would weigh on the stocks. The Industrial Select Sector SPDR ETF is about flat for the year but would look more expensive than it is today if earnings estimates drop more. The stocks face a high probability of downside from here.

The stocks to own are the “defensive” ones, those that are unlikely to see much tariff-related earnings impact, namely healthcare. Demand for drugs and insurance is much sturdier versus less essential goods and services when consumers have less money to spend. The Health Care Select Sector SPDR ETF has produced a 6% gain this year.

That’s supported by earnings trends that are just fine. First-quarter earnings estimates have even ticked slightly higher this year. These stocks should remain relatively strong as long as analysts continue to forecast stable, albeit mild, sales and earnings growth for the coming few years.

“This leads us to recommend healthcare and disfavour consumer discretionary,” Parker writes.

Is Tesla the Meme Stock of Yesteryear?

Just as Elon Musk’s firm begins to look fundamentally more solid, investors have moved on to other speculative objects.