Musk breaks the spell he had woven around Tesla
For much of this year, while other growth stocks fell, Tesla seemed to defy gravity. Bulls complained that shares in Elon Musk’s electric car maker were suffering because of his bid for Twitter. But as recently as three months ago, with the stock down just 25 percent from its November 2021 peak, it was still possible to believe it would escape the worst carnage.
Not any more. A terrible December has wiped more than 40 percent off Tesla shares, leaving them two-thirds lower than their level at the end of September. Before a partial rebound early Thursday, Tesla’s stock market value had fallen to $355 billion, a staggering drop of nearly $900 billion from its peak in 2021.
It’s easy to find reasons for this selloff at a time when growth is out of fashion on Wall Street and the auto industry is facing an uncertain 2023. But Musk himself must take some of the blame. Whether it was arrogance, carelessness, or simply boredom with his day job, his personal mistakes served as a catalyst for the downfall.
One is the mismanagement of his extraordinary public persona. Musk likes to claim that his Twitter presence has been of immeasurable value to Tesla shareholders. Along the way, he had a point. It was a megaphone that helped cement him in the public consciousness as the world’s preeminent entrepreneur, even if it brought uncomfortable public flings and run-ins with regulators.
But as he has ignited chaos and polarization on Twitter in the two months since taking over, his personal brand — and, by extension, Tesla’s — has been tarnished.
A second mistake was taking the elevated company stock for granted. Turning his attention to Twitter at a time when the auto industry seems on the brink of a downturn, and as serious competition in electric vehicles finally begins to rise, seems like seriously bad judgment, even if it turns out to be just temporary.
Musk also seems to have believed he could treat his Tesla stock like a piggy bank. He began selling two days after the stock peaked and has continued to dispose of just under $40 billion of his stock, continuing to sell even after he said he would stop (a comment he repeated last week). With his current stake in Tesla now worth $51.7 billion, disposals seem significant.
Actions like these help explain how the stock market magic that Musk managed to spin around himself and Tesla has been broken. And where emotions have retreated, rational analysis has stepped in to provide ample justification for a wild reappraisal.
For many, it was possible to believe that Tesla was on the verge of capturing the lion’s share of a giant new electric vehicle market that was about to open up. But as Musk warned on Twitter last week, higher interest rates and an uncertain economy point to a tough period ahead. With customer waiting lists falling sharply in Tesla’s two biggest markets, the US and China, the stability of demand has for the first time replaced supply as the main concern for the company’s investors.
Tesla had already warned in October that inventory levels were likely to rise further this quarter as production outpaced deliveries and that profit margins would again be under pressure. This month it began offering $7,500 in incentives to anyone who takes delivery of a Model 3 or Model Y before the end of the year.
All of this comes as Tesla approaches the crossroads that all growth stocks eventually reach. Sustaining the rapid expansion that Musk has promised is starting to look challenging without taking actions that will fuel the gains that Wall Street has now come to expect.
Over the past two years, the 30 percent gross margin in Tesla’s auto operations (at least, until higher costs rose this spring) was roughly double that of Ford and General Motors and easily above Toyota’s 19 percent. -s. The quest to preserve margins could further affect the rising stock valuation that still supports the company, even after the slide.
None of this diminishes the incredible success Tesla can show as it finishes another year of growth that other automakers could only dream of. But a stock market value that is double Toyota’s and a share price 30 times this year’s expected earnings still leaves room for further disappointment.
