“Musk risk” has weighed on Tesla Inc.’s stock for some time now. But it reached another level this week, as the electric car maker’s lead on mercury sparked even more controversy and sent the company’s shares tumbling.
Tesla’s stock price has fallen 16% over the past five sessions, its worst week since the pandemic hit in March 2020. By comparison, the S&P 500 Index and the Nasdaq 100 Index were down less than 3%. The performance is even uglier in retrospect, with the stock up 43% this quarter as prominent Wall Street analysts scale back their expectations for Elon Musk’s company and the electric car industry as a whole.
The activity surrounding Musk and Tesla over the past week has been overwhelming. The sale dropped the company below $500 billion in market value for the first time in more than two years. Goldman Sachs and RBC Capital Markets cut their price targets on the stock. Musk then caused a stir when he sold nearly $3.6 billion in Tesla stock, possibly to help refinance debt for his Twitter purchase.
In addition, Musk was knocked off the top of the Bloomberg Billionaires Index, meaning he is no longer the world’s richest person. And his controversial handling of Twitter’s social media rules, which have weakened some of Tesla’s customer base, intensified Thursday when he suspended the Twitter accounts of prominent journalists at outlets such as the New York Times and the Washington Post.
“I think stocks are only going to go down from here,” said Kathryn Fadis, senior portfolio manager at Fernwood Investment Management. “Elon Musk has damaged his reputation with this Twitter business and negative news feed.”
As concerns about the economy and recession continue to grow next year, Tesla’s outlook is likely to darken. Demand for its pricey electric cars may fall as high inflation and rising interest rates dampen demand from consumers reluctant to spend on big-ticket items. The specter of a slowdown is likely to drive stock investors looking for safety in stable purchases rather than growth stocks like Tesla.
“When you have a high-octane growth stock based on forecasts that are years out, confidence is very important, and once that confidence is broken, the stock can collapse as support goes away,” Fadis said.
Danger of electric vehicles
Based on Tesla’s valuation alone, there is likely room for further downside. At its current market capitalization of $474 billion, it is still head and shoulders above the world’s leading automakers. It trades at 36 times forward earnings, compared with General Motors Co., Ford Motor Co. and Honda Motor Co. Ltd. as well as Toyota Motor Corp. with high-teens multiples to mid-to-high single digits. . Tesla even beats the Nasdaq 100 Index’s average price-to-earnings ratio of 22.
And there are risks to the stock beyond valuation and concerns that Musk is too busy turning around Twitter.
Earlier this week, Morgan Stanley analyst Adam Jonas warned that the brakes were “squealing” on demand for electric vehicles as prices rise due to rising raw materials, pushing affordability to breaking point. Jonas lowered his expectations for the pace of electric vehicle adoption in the U.S. by the end of the decade. Goldman Sachs analyst Mark Delaney echoed a similar tone, saying that softening macro indicators in several regions and Tesla’s recent price cuts suggest global supply-demand dynamics are now softer for the company.
“We expect 2023 to be a tough year for the sector as slowing demand is met by a significant increase in supply,” said SPEAR Invest Chief Investment Officer Ivana Delevska. Tesla is no longer a standout player and will therefore begin to see cyclical growth in the same way as other automakers. Additionally, Tesla is “selling into a mid-range luxury market that could be hit particularly hard.”
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