Musk is breaking the spell he weaved around Tesla

For most of this year, as other growth stocks collapsed, Tesla seemed to defy gravity. Bulls complained that shares of Elon Musk’s electric car maker were being hurt by his bid for Twitter. But as recently as three months ago, when the stock was down just 25 percent from its November 2021 high, it was still possible to believe it would survive the worst of the carnage.

Not anymore. Tesla’s shares have tumbled more than 40 percent in a dismal December, leaving them two-thirds below their late September levels. Before a partial recovery early Thursday morning, Tesla’s stock had fallen to $355 billion, a stunning drop of nearly $900 billion from its 2021 peak.

The reasons for this selloff are easy to find at a time when growth is out of fashion on Wall Street and the auto industry faces an uncertain 2023. Whether out of arrogance, carelessness, or simply boredom with his day job, his personal missteps served as the catalyst for his downfall.

One of them is the mismanagement of his own massive public persona. Musk likes to argue that his Twitter presence has been of immeasurable value to Tesla shareholders. On the way up, he had a point. It was a megaphone that helped cement him in the public consciousness as the world’s most formidable entrepreneur, even if it led to nasty public controversy and run-ins with regulators.

But as he caused chaos and polarization on Twitter in the two months since the takeover, his personal brand — and, by extension, Tesla — has been tarnished.

The second misstep was to take the company’s elevated stock for granted. Turning his attention to Twitter at a time when the auto industry appears to be on the brink of decline and when serious competition from electric vehicles is finally starting to grow seems like a serious misjudgment, even if it turns out to be only temporary.

Musk also seems to have believed he could treat his Tesla stock as a piggy bank. He began selling two days after the stock peaked, and managed just under $40 billion of his holdings, continuing to sell even after he said he would stop (a comment he repeated last week). With his current stake in Tesla at $51.7 billion, divestitures look significant.

Actions like these help explain how the stock market magic that Musk was able to spin around himself and Tesla broke. And where emotion has receded, rational analysis has stepped in to provide ample justification for savage reappraisal.

It was possible for many to believe that Tesla was on the verge of capturing the lion’s share of the new giant electric car market that was about to open up. But as Musk warned on Twitter last week, higher interest rates and an uncertain economy point to tough times ahead. With customer waiting lists shrinking sharply in Tesla’s two biggest markets, the US and China, the stability of demand has for the first time replaced supply as the company’s top investor concern.

Tesla had already warned in October that inventory levels were likely to rise this quarter as production outpaced supplies and that profit margins would again be under pressure. This month, it began offering incentives of $7,500 to anyone who takes delivery of a Model 3 or Model Y by the end of the year.

All of this comes as Tesla approaches the crossroads that all bullish stocks eventually reach. The rapid expansion that Musk promised is starting to look difficult without taking steps that would translate into the gains that Wall Street now expects.

Over the past two years, Tesla’s 30 percent gross margin in its auto operations (at least until higher costs this spring) has roughly doubled that of Ford and General Motors and comfortably beats Toyota’s 19 percent. The drive to preserve margins could have a bigger impact on the stock’s growth, which still supports the company even after the slide.

None of this detracts from the incredible success that Tesla can point to as it ends another year of growth that other automakers could only dream of. But a stock market value double that of Toyota and a share price of 30 times this year’s expected earnings still leaves room for further disappointment.

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