Tesla Is Losing a Big Force Behind This Year’s Rally

(Bloomberg) — A key force behind this year’s rally in Tesla Inc. shares is losing momentum.

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Retail traders whose purchases have helped push the electric-vehicle maker’s stock up over 50% in 2023 are pulling back this month amid disappointment over a recent investor day and concerns over the health of the economy.

Net daily purchases of Tesla shares by individuals have fallen by about three-fourths from a peak of $436 million on March 1, as of Wednesday, according to data from Vanda Research. In fact, retail investors were net sellers of the stock on Tuesday for the first time in nearly a year.

“After a brief period when Tesla’s stock price looked to be offering decent value, the shares seem to be back in the realm of expensive, and retail investors have stepped back,” said Paul Allison, senior analyst at Finimize Ltd., an investing insights platform owned by abrdn.

It’s an about face from mom-and-pop investors, who have often helped to supercharge any Tesla rally through aggressive buying. Their enthusiasm has waned in the wake of the March 1 investor day that lacked specific details on a much-anticipated new vehicle. Since then, the shares have dropped more than 6.5%, compared with a 1% decline in the S&P 500 Index and the Nasdaq 100’s roughly 6% gain.

Caution among retail investors has been fanned lately by fears about problems in the banking industry spreading in the wake of the collapse of Silicon Valley Bank and Signature Bank.

With such a rich valuation, Tesla is particularly sensitive to any deterioration in investor sentiment. The stock trades at 44 times forward earnings compared with mid-to-high single-digit multiples for General Motors Co. and Ford Motor Co., and even surpassing the Nasdaq 100’s average price-to-earnings ratio of 24.

“The valuation level relative to the car industry reflects very high expectations for future operating margin and total market share,” said Peter Garnry, head of equity strategy at Saxo Bank A/S. “That is basically the reference point as an investor. You are buying a stock that is priced for almost perfection.”

Some recent disappointments haven’t played to such a narrative. In addition to the investor day failing to deliver on the hype that had built ahead of it, the company announced another price cut on its most expensive cars, while the US National Highway Traffic Safety Administration opened an investigation over complaints that the steering wheel can fall off certain new Model Y vehicles while in use.

Wall Street has turned more cautious after the early rally as well, with at least three analysts downgrading the stock just this month.

Tesla’s “valuation now leaves less room for disappointment,” Berenberg analyst Adrian Yanoshik wrote, while lowering his recommendation to hold from buy early this month.

A rally in the stock this week — after a credit-rating upgrade that lifted its bonds to investment grade status and some encouraging sales data from China — highlights how Tesla’s strong momentum can quickly take over whenever the narrative shifts.

In the near term, first-quarter delivery figures due early next month could also turn sentiment quickly, especially if the numbers show the big price cuts instituted in early January boosted demand. That would also underscore a key advantage that the company has over its rivals, who followed Tesla’s cuts by lowering their own prices.

“Since Tesla has higher gross margins to begin with, the margins at competitors are more at risk,” said Jerry Braakman, chief investment officer of First American Trust.

Tech Chart of the Day

Nvidia Corp. logged its longest winning streak since December 2016 on Thursday. The chipmaker is the best-performing stock on the S&P 500 Index this year, thanks to an 84% rally that’s been fueled by the recent artificial-intelligence frenzy. Shares are poised for a loss Friday, it would be the first time the stock has fallen in the past 10 sessions