Why Tesla Stock Plunged 26% in July

Tesla (NASDAQ: TSLA) stock is coming off its worst month in over three years. The electric vehicle (EV) leader lost 26% of its value in July, according to data provided by S&P Global Market Intelligence. That was the largest monthly drop since December 2022.

The stock plunged 40% that month but rebounded strongly, posting a 47% gain in January 2023. If history repeats itself, now may be a great time to jump into Tesla stock. Investors should be cautious, though.

Image source: The Motley Fool.

Time to buy the dip?

Tesla CEO Elon Musk has been driving the narrative that the EV leader should be seen as an artificial intelligence (AI) technology company. He has positioned its autonomous driving software and robotics businesses as the company's future. While Tesla announces incremental progress in its driverless robotaxi rollout, growth has been slow. That is likely why investors have become less enamored with Tesla stock.

It's also possible that the initial public offering (IPO) of Musk's Space Exploration Technologies has attracted some investor capital that had been with Tesla. If one just looks at Tesla's business results and trends, though, the selling makes sense. Tesla's trailing 12-month (TTM) net income has dropped 64% over the past three years, even as revenue has risen by 8%. Profitability is trending in the wrong direction, making robotics and autonomous vehicle technologies the true hope for an already expensive stock.

Speculating on Tesla

Despite declining profitability, Tesla remains an EV leader. That business helps fund its other aspirations, including an energy storage segment that continues to grow robustly. An investment in Tesla now, though, is a speculative bet on its AI and robotics segments. It's still a profitable company selling EVs, but investors have bid the stock up beyond what that segment is worth.

The stock trades at over 150 times forward earnings and even pushes 200 times, depending on earnings estimates. The EV business won't reach that valuation without a successful driverless robotaxi fleet.

That's Musk's vision, though, along with a humanoid robot line that goes into mass production. Speculating on the stock means believing in those new business lines. Both have massive potential, but come with high risk.

Holding speculative stocks in a portfolio isn't a bad thing, though. It just needs to be properly allocated so that failure won't wipe you out, and a small investment could be enough to make a big impact. July's stock swoon made it a better time to bet on Tesla, as long as investors realize it remains a bet on future business lines.

Howard Smith has positions in Tesla. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.