“Musk risk” has weighed on Tesla Inc. stock for some time now. But it reached another level this week as the electric vehicle manufacturer’s mercurial leader sparked even more controversy and the company’s stock plummeted.
Tesla’s share price fell 16% over the past five sessions for its worst week since the pandemic hit in March 2020. By comparison, the S&P 500 Index and Nasdaq 100 indices fell less than 3%. The performance is even uglier looking further back, with stocks down 43% year to date this quarter as leading Wall Street analysts revise their expectations for Elon Musk’s company and the electric vehicle industry as a whole.
The swarm of activity around Musk and Tesla over the past week has been overwhelming. The selloff pushed the company below its $500 billion market value for the first time in more than two years. Goldman Sachs and RBC Capital Markets have lowered their share price targets. Then Musk raised his eyebrows when he sold nearly $3.6 billion worth of Tesla stock, possibly to blame for his purchase of Twitter Inc. help refinance.
In addition, Musk was knocked off the top of the Bloomberg Billionaires Index, meaning he is no longer the richest person in the world. And his controversial management of Twitter’s social media rules, which have soured some of Tesla’s customer base, were bolstered Thursday when he suspended the Twitter accounts of well-known journalists at outlets like the New York Times and Washington Post.
“I think the stock will only go down from here,” said Catherine Faddis, senior portfolio manager at Fernwood Investment Management. “Elon Musk has damaged his reputation with this Twitter business and all the negative news flow.”
As concerns about the economy and a recession continue to grow next year, Tesla’s outlook is likely to become more bleak. Demand for its expensive electric vehicles could decline as high inflation and rising interest rates undercut demand from consumers reluctant to spend on big tickets. The specter of a slowdown is likely to cause equity investors to seek safety in stable buys rather than growth stocks like Tesla.
“When you have a high-growth stock that relies on forecasts that are years away, trust is very important, and once trust is broken, the stock can collapse as support wears off,” said Faddis.
Electric vehicle risk
Based on Tesla’s valuation alone, there is likely room for further declines. With its current market cap of $474 billion, it still stands head and shoulders above the largest automakers in the world. It trades at 36 times future earnings compared to mid to high single digit multiples for General Motors Co., Ford Motor Co. and Honda Motor Co. Ltd., as well as Toyota Motor Corp.’s high-teen multiple. . Tesla even surpasses the average price-to-earnings ratio of 22 of the Nasdaq 100 index.
And there are risks to the stock beyond valuation and concerns that Musk is too preoccupied with Twitter’s turnaround.
Earlier this week, Morgan Stanley analyst Adam Jonas warned that the brakes were “screeching” on demand for electric vehicles as prices rise due to rising raw material costs, pushing affordability to breaking point. Jonas lowered his expectations for the pace of electric vehicle adoption in the US through the end of the decade. Goldman Sachs analyst Mark Delaney struck a similar note, saying that declining macro indicators in several regions and Tesla’s recent price cuts suggest that global supply-demand dynamics are now softer for the company.
“We expect 2023 to be a difficult year for the industry as slowing demand is accompanied by a significant increase in supply,” said Ivana Delevska, chief investment officer at SPEAR Invest. Tesla is no longer a niche player and will therefore see cyclicality like other car manufacturers. In addition, Tesla sells “to the mid-range luxury market, which could be particularly hard hit.”
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