Musk’s worrisome week pushes Tesla investors closer to the edge

(Bloomberg Opinion) — “Musk risk” has been weighing on Tesla Inc. stock for some time. But it reached another level this week when the EV maker’s mercurial leader stirred even more controversy and sent the company’s shares tumbling.

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Tesla’s stock price has plunged 16% over the past five sessions in its worst week since the pandemic struck in March 2020. By comparison, the S&P 500 and Nasdaq 100 indices are down less than 3%. The performance is even uglier looking back, with shares plunging 43% so far this quarter as top Wall Street analysts lowered their expectations for Elon Musk’s company and the broader EV industry. .

The swarm of activity surrounding Musk and Tesla in the past week has been overwhelming. The liquidation pushed the company below a $500 billion market value for the first time in more than two years. Goldman Sachs and RBC Capital Markets slashed their price targets for the shares. Musk then surprised when he sold nearly $3.6 billion of Tesla stock, possibly to help refinance the debt from his purchase of Twitter Inc.

Also, 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 handling of Twitter’s social media rules, which have affected some of Tesla’s customers, escalated Thursday when he suspended the Twitter accounts of well-known journalists at outlets including the New York Times and the Washington Post. .

“I think stocks are only going to go down from here,” said Catherine Faddis, a senior portfolio manager at Fernwood Investment Management. “Elon Musk has damaged his reputation with this Twitter business and all the negative news flow.”

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As concerns about the economy and a recession next year mount, the outlook for Tesla is likely to darken. Demand for its pricey electric vehicles could wane as high inflation and rising interest rates undermine demand from consumers reluctant to spend on big-ticket items. The specter of a slowdown will likely have equity investors looking for safety in steady buys rather than growth stocks like Tesla.

“When you have a high-octane growth stock that is based on projections that are years away, confidence is very important, and once confidence is broken, the stock could crash as support fades.” Fadis said.

Electric Vehicle Risk

Based on Tesla’s valuation alone, there’s probably room for more downside. With its current market capitalization of $474 billion, it is still well ahead of the world’s leading automakers. It is trading at 36 times future earnings compared to the mid-to-high single digit multiples of General Motors Co., Ford Motor Co. and Honda Motor Co. Ltd., as well as the high teen multiple of Toyota Motor. Corp. . Tesla even beats the Nasdaq 100 Index average price-earnings ratio of 22.

And there are risks to the stock beyond valuation and concerns that Musk is too concerned about Twitter’s turnaround.

Earlier this week, Morgan Stanley analyst Adam Jonas warned that the brakes were “squealing” on demand for electric vehicles as prices surged on rising raw material costs, prompting the affordability to the limit. Jonas lowered his expectations for the rate of adoption of electric vehicles in the US until the end of the decade. Goldman Sachs analyst Mark Delaney took a similar tone, saying moderating 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 difficult year for the sector as slowing demand is met 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 start to look at cyclicality just like other automakers. On top of that, Tesla “sells into the middle-class luxury market, which may be particularly affected.”

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