Musk’s Troubling Week Pushes Tesla Investors Closer to the Edge

(Bloomberg) — “Musk risk” has been weighing on Tesla Inc.’s stock for some time now. But it reached another level this week as the electric-vehicle maker’s mercurial leader stirred up even more controversy and sent the company’s shares plunging.

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Tesla’s stock price sank 16% over the last five sessions for its worst week since the pandemic struck in March 2020. By comparison, the S&P 500 Index and Nasdaq 100 indexes declined less than 3%. The performance is even uglier looking further back, with the shares tanking 43% so far this quarter as prominent Wall Street analysts dial back their expectations for Elon Musk’s company and the electric-vehicle industry as a whole.

The swarm of activity surrounding Musk and Tesla just this past week has been overwhelming. The selloff 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 slashed their price targets on the stock. Then Musk raised eyebrows when he sold almost $3.6 billion of Tesla shares, possibly to help refinance debt from his purchase of Twitter Inc.

In addition, Musk was toppled from the peak of the Bloomberg Billionaires Index, meaning he’s no longer the richest person in the world. And his controversial management of Twitter’s social media rules, which have soured some of Tesla’s customer base, amped up Thursday when he suspended the Twitter accounts of well-known journalists at outlets like the New York Times and Washington Post.

“I think the stock is only going to 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 concerns about the economy and a recession next year continue to grow, Tesla’s outlook is likely to darken. Demand for its expensive electric vehicles could wane as high inflation and rising interest rates sap demand from consumers reluctant to spend on big ticket items. The specter of a slowdown will probably have equity investors seeking safety in stable buys rather than growth stocks like Tesla.

“When you have a high-octane growth stock that relies on projections that are years away, confidence is very important, and once the confidence is broken the stock could break down as support ebbs away,” Faddis said.

EV Risk

Based on Tesla’s valuation alone there’s probably room for further declines. At its current $474 billion market capitalization, it’s still head and shoulders above the top global auto manufacturers. It trades at 36 times forward earnings compared to the 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 high-teens multiple. Tesla even surpasses the Nasdaq 100 Index’s average price-to-earnings ratio of 22.

And there are risks for the stock beyond valuation and concerns that Musk is too preoccupied with Twitter’s turnaround.

Earlier this week, Morgan Stanley analyst Adam Jonas warned that the brakes were “screeching” on demand for electric vehicles as prices climb due to soaring raw material costs, taking affordability to the breaking point. Jonas lowered his expectations for the rate of electric-vehicle adoption in the US 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 the global supply-demand dynamic is now softer for the company.

“We expect that 2023 will be a tough year for the sector as slowing demand is met with significant increase in supply,” said Ivana Delevska, chief investment officer at SPEAR Invest. Tesla is not a niche player anymore and therefore will start seeing cyclicality just as other auto manufacturers. On top of that, Tesla “sells into the middle-class luxury market, which may be particularly hard hit.”