(Bloomberg) — “Musky risk” has plagued Tesla Inc. shares for some time now. But it hit another level this week as the electric vehicle maker’s mercurial leader sparked even more controversy and sent the company’s shares plunging.
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Tesla’s share price has fallen 16% in the past five sessions for its worst week since the pandemic hit in March 2020. By comparison, the S&P 500 and Nasdaq 100 indices are down less than 3% . The performance is even uglier looking further ahead, with shares falling 43% so far this quarter as leading Wall Street analysts lower expectations for Elon Musk’s company and the vehicle industry electricity as a whole.
The swarm of activity surrounding Musk and Tesla last week has been overwhelming. The sale pushed the company below a market value of $500 billion for the first time in more than two years. Goldman Sachs and RBC Capital Markets lowered their price targets on the stock. Then Musk raised his eyebrows when he sold nearly $3.6 billion worth of Tesla stock, possibly to help refinance debt from his purchase of Twitter Inc.
Additionally, 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 aggravated some of Tesla’s customer base, amplified on Thursday when he suspended the Twitter accounts of well-known journalists at outlets like The New York Times and the 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.”
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As worries about the economy and a recession next year continue to grow, Tesla’s outlook is expected to darken. Demand for its pricey electric vehicles could decline as high inflation and rising interest rates undermine demand from consumers reluctant to spend on big-ticket items. The specter of a downturn will likely cause equity investors to seek safety in stable buys rather than growth stocks like Tesla.
“When you have a high-octane growth stock that is sitting on projects years away, confidence is very important, and once confidence is broken, the stock could crash as support wanes. “, Faddis said.
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Based on Tesla’s valuation alone, there is likely room for further declines. With its current market capitalization of $474 billion, it is still above the world’s leading automakers. It trades at 36 times forward earnings against 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 teen multiple. Tesla even exceeds the average price-earnings ratio of the Nasdaq 100 index by 22.
And there are risks to the stock beyond valuation and worries that Musk is too preoccupied with Twitter’s turnaround.
Earlier this week, Morgan Stanley analyst Adam Jonas warned that the brakes were “squealing” on demand for electric vehicles as prices soared due to soaring raw material costs, bringing affordability to the breaking point. Jonas lowered his expectations for the rate of adoption of electric vehicles in the United States through the end of the decade. Goldman Sachs analyst Mark Delaney struck a similar tone, saying moderating macro indicators in several regions and Tesla’s recent price cuts suggest that global supply and demand dynamics are now more sweet for the company.
“We expect 2023 to be a difficult year for the sector, as the slowdown in demand is met with a significant increase in supply,” said Ivana Delevska, chief investment officer at SPEAR Invest. Tesla is no longer a niche player and will therefore begin to view cyclicality like other automakers. On top of that, Tesla “sells into the middle-class luxury market, which may be particularly hard hit.”
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