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

(Bloomberg) — “Musk risk” has weighed on Tesla Inc.’s stock for some time now. But it reached a new level this week when the electric car maker’s mercurial leader sparked even more controversy and sent the company’s shares tumbling.

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Tesla’s stock price fell 16% over the past five sessions for its worst week since the pandemic hit in March 2020. By comparison, the S&P 500 and Nasdaq 100 fell less than 3%. The performance is even worse looking further back, with shares up 43% so far this quarter as prominent Wall Street analysts beat back expectations for Elon Musk’s company and the EV industry as a whole.

The flurry of activity surrounding Musk and Tesla over the past week has been overwhelming. The sale 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 cut their price targets on the stock. Then Musk raised eyebrows when he sold nearly $3.6 billion in Tesla stock, possibly to help refinance debt from the purchase of Twitter Inc.

In addition, Musk was toppled from the top of the Bloomberg Billionaires Index, meaning he is no longer the richest person in the world. And his controversial handling of Twitter̵[ads1]7;s social media rules, which has soured some of Tesla’s customer base, intensified Thursday when he suspended the Twitter accounts of well-known journalists at outlets like the New York Times and the 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 worries about the economy and a recession next year continue to grow, Tesla’s outlook is likely to darken. Demand for the expensive electric vehicles could be slowing as high inflation and rising interest rates suppress demand from consumers reluctant to spend on big-ticket items. The specter of a downturn is likely to prompt equity investors to seek safety in stable purchases rather than growth stocks like Tesla.

“When you have a high-octane growth stock that relies on forecasts that are years out, trust is very important, and when that trust is broken, the stock can collapse as support ebbs,” Faddis said.

EV Risk

Based on Tesla’s valuation alone, there is likely room for further decline. With its current market capitalization of $474 billion, it remains head and shoulders above the top global automakers. It trades at 36 times forward earnings, compared with 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 to 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 are “squealing” on demand for electric vehicles as prices rise due to soaring raw material costs, pushing affordability to breaking point. Jonas lowered expectations for the speed of electric vehicle adoption in the US through the end of the decade. Goldman Sachs analyst Mark Delaney struck a similar tone, saying that moderating macro indicators in several regions and Tesla’s recent price cuts suggest that global supply-demand dynamics are now softer for the company.

“We expect 2023 to be a tough year for the sector as slowing demand is met with significant increases in supply,” said Ivana Delevska, chief investment officer at SPEAR Invest. Tesla is no longer a niche player and will therefore start to see the cycling scene just like other car manufacturers. On top of that, Tesla is selling into the middle-class luxury market, which could be particularly hard hit.

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