Musk’s Trouble Week Pushes Tesla Investors To Brink

(Bloomberg) — The “Musk menace” kept weighing on shares of Tesla Inc. for some time now. But it reached another level this week as the electric car maker’s mercurial leader stoked more controversy and sent the company’s shares plummeting.

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Tesla’s share price has fallen 16% over the past five sessions in its worst week since the pandemic hit in March 2020. By comparison, the S&P 500 and Nasdaq 100 are down less than 3%. The performance is even uglier looking back, with shares down 43% so far this quarter as prominent Wall Street analysts downgrade their forecasts for Elon Musk’s company and the electric car industry as a whole.

The bevy of activity surrounding Musk and Tesla this past week has been massive. The sale pushed the company below its $500 billion market value for the first time in more than two years. Goldman Sachs and RBC Capital markets cut their price targets on the stock. Musk then raised eyebrows when he sold nearly $3.6 billion in Tesla stock, possibly to help refinance debt from his purchase of Twitter Inc.

In addition, Musk has been ousted from the peak of the Bloomberg Billionaires Index, which means that he is no longer the richest person in the world. And his controversial management of Twitter’s social media rules, which have blighted some of Tesla’s customer base, increased on Thursday when he suspended the Twitter accounts of well-known journalists at media outlets such as the New York Times and Washington Post.

“I think the stock will only go down from here,” said Catherine Fadis, senior portfolio manager at Fernwood Investment Management. “Elon Musk has damaged his reputation with this Twitter activity and all of 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 become bleak. Demand for its expensive electric cars could wane as high inflation and rising interest rates sap demand from consumers who are reluctant to spend on expensive items. The specter of a slowdown will likely prompt stock investors to seek safety in stable buys rather than growth stocks like Tesla.

“When you have a high-octane growth stock based on forecasts that are years away, confidence is very important, and once confidence is broken, the stock can collapse as the support erodes,” Fadis said.

EV risks

Based on Tesla’s valuation alone, there is likely room for further declines. With its current market value of $474 billion, it still outperforms the top global automakers. It trades at forward earnings of 36 times the mid-to-high single-digit multiples of General Motors, Ford Motor and Honda Motor Co., as well as Toyota Motor Corp. . Tesla even surpassed the Nasdaq 100’s average price-to-earnings ratio of 22.

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

Earlier this week, Morgan Stanley analyst Adam Jonas warned that the brakes were “squealing” on demand for electric vehicles as prices soared due to higher raw material costs, driving affordability to a breaking point. Jonas lowered his forecast for the rate of electric vehicle adoption in the United States through the end of the decade. Goldman Sachs analyst Mark Delaney struck a similar tone, saying moderate macro indices in many regions and recent price cuts at Tesla suggest the global supply-demand dynamic is now softer for the company.

“We expect 2023 to be a challenging year for the sector as slowing demand is offset by a significant increase in supply,” said Ivana Delevska, chief investment officer at SPEAR Invest. Tesla is not a niche player anymore, and so it will start to see cyclical swings just like other automakers. Moreover, Tesla sells into the middle-class luxury goods market, which could be hit particularly hard.

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