Tesla’s Plunge Drags Valuation Below $500 Billion on Margin Fear

(Bloomberg) — Tesla Inc. shares extended their brutal selloff, pulling the company’s market valuation below the key half-trillion dollar mark as investors increasingly fear its price-cutting plan will eat into profits.

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The stock price closed down 4.3% at $153.75, the lowest since Jan. 25. The company has lost more than $84 billion from its market capitalization over five trading sessions since posting disappointing earnings. The shares are down more than 26% in April alone.

Tesla on Thursday reported first-quarter results that missed analysts expectations on nearly every metric. Most significantly, profit margins plunged, displaying the impact of the company’s aggressive price-cut strategy. Investors were particularly rattled by Chief Executive Officer Elon Musk indicating that Tesla will keep lowering prices to coax potential buyers of its vehicles.

“Despite significant price cuts, demand still appears challenged for Tesla and price elasticity appears to be more muted than Tesla believed,” Bernstein analyst Toni Sacconaghi wrote in a note Thursday. “We maintain that price cuts have and will undermine industry profitability (including Tesla’s), but that incumbents are deep pocketed and not likely to back down.”

The results sparked a flurry of price-target reductions by Wall Street analysts, who pointed to the risks to Tesla’s premium valuation amid a steep erosion in profit margins. The company’s hefty margins are often cited by bulls as one of the key reasons why the stock deserves to trade at a much higher multiple than rival automakers.

Tesla shares have been on quite a journey this year. After ending 2022 with a steep 65% plunge that pushed its valuation to around $340 billion in early January, the stock rallied rapidly for two months and the company’s market capitalization ballooned to more than $670 billion. But that optimism faded in early April after the first-quarter delivery numbers showed the price cuts were not increasing demand as much as expected. Then, the full results reported last week made the point even clearer.

Falling Behind

Meanwhile, oil major Exxon Mobil Corp. is breathing down the EV maker’s neck on the S&P 500 leader board, as it is set to rise above the $500 billion milestone for the first time since 2007. Luxury-goods behemoth LVMH is in the race as well.

The companies trading places, temporarily or not, highlights the higher volatility in Tesla shares. One reason could be the company’s premium valuation — the stock trades at 41 times its forward earnings, compared to Exxon’s 12 and LVMH’s 25 — leaving little margin for error.

Read more: Tesla Cut to Hold at Jefferies as Multiple Under Scrutiny

Still, optimists remain, as some on Wall Street see the selloff as a temporary blip brought on by wider macro-economic pressures. In the longer term, they say, Tesla’s still-high margins can leave it better positioned than peers to weather this storm.

For example, Cathie Wood, an ardent Tesla bull and the CEO of Ark Investment Management, said in an interview with CNBC last week that her 2027 price target for the stock is $2,000.

“While skeptics may focus on less than 20% automotive gross margin, we think an obsession with this metric is unwarranted,” Piper Sandler analyst Alexander Potter wrote in a note. “Once the dust settles, Tesla should bounce back.”

(Updates stock moves in first deck and second paragraph. Updates chart with closing price.)