Tesla shares are down 70% for the year

New York
CNN
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Tesla’s stock is ending its turbulent year with even more turbulence: It’s up nearly 6% Thursday, but still down more than 10% since last week. And another cut in the price target from Morgan Stanley does not help.

So far this year, the stock is down around 70 percent. Morgan Stanley analysts said Thursday that the company’s sliding share price represents a buying opportunity, but they cut their price target from $330 a share to $250. Tesla shares are trading at $122, with shares up about 8% on Thursday.

Morgan Stanley still believes that the company is somewhat undervalued as a result of the large sales recently, citing the head start in relation to the electric car competition, and potential tax benefits as a result of the Inflation Reduction Act that was passed earlier this year.

However, the losses have put a dent in the fortunes of one of the world’s richest people. According to the Bloomberg Billionaires Index, CEO Elon Musk is now worth $132 billion – less than half of what he was worth at the beginning of the year. He lost the world’s richest title two weeks ago to Bernard Arnault, chairman of French luxury goods giant LVMH (LVMHF).

A popular misconception has emerged about Elon Musk and Tesla: The mega-billionaire’s love affair with Twitter is the main reason why Tesla shares have lost so much value this year.

Even as Musk signals he may relinquish the CEO title on Twitter, investors have worried that the outlook for Tesla’s sales and profits is taking a turn for the worse. A sign of the weakened demand: Tesla has announced a rare sale. The company offered two discounts for buyers who take delivery of a vehicle before the end of the year, initially offering a $3,750 discount earlier this month. Tesla then doubled the rebate to $7,500 last Thursday.

“Tesla is clearly starting to see cracks in demand in China and in the U.S. at a time when competition from EVs is increasing across the board,” said Dan Ives, technical analyst at Wedbush Securities and a Tesla bull who cut his price target on the stock last time. Friday from $250 to $175. “The price cuts that Tesla adopted were the straw that broke the camel’s back on the stock.”

Another reason Tesla’s shares are falling: The US economy could tip into recession next year, hurting car sales. Musk said on a Twitter call from Spaces two weeks ago that he expects the economy to be in a “severe recession” by 2023.

“I think there’s going to be some macro drama that’s higher than people think at the moment,” he said, according to Reuters, adding that homes and cars would be “disproportionately affected” by economic conditions.

Part of the problem with Tesla’s share price is that critics question whether it was ever worth the trillion-dollar valuation it had at the start of the year. At its peak, Tesla was worth more than the 12 largest automakers on the planet combined, despite having a fraction of the sales of any of them. Today it is worth $399 billion.

“It got ahead of itself in the short term,” said Gene Munster of Loup Ventures, another Tesla fan. “I still think this can be a much bigger company. I think it will see those kinds of numbers again. But it could take a long, long time to get there.”

Tesla’s growth prospects – a target of 50% annual sales growth – helped drive this valuation. It admitted in October that it will miss that sales target for this year.

The stock’s rise to dizzying heights — up 743% in 2020 alone — was fueled by Musk’s reputation as a genius who would disrupt the vast global auto industry.

“Tesla was seen as a disruptive technology company, not as an automaker, and a large part of that premium is tied to Musk,” Ives said.

Critics of Tesla said much of the skyrocketing value was based on promises Musk made about future products, many of which arrived years after they were originally promised.

A good example is the Cybertruck, Tesla’s pickup truck, which was first unveiled three years ago with promises that production would start in 2021.

Now, production is slated to begin next year, with production ramping up in 2024, putting that year behind other electric pickup offerings from Ford and upstart EV maker Rivian, both of which have electric pickups available for purchase today. It may also follow planned electric pickup offerings from General Motors.

“Elon Musk has a pathological problem with the truth,” said Gordon Johnson, one of Tesla’s biggest critics among analysts. “When people say he’s a genius and innovator, it’s based on all the promises he never lives up to.”

Johnson said Tesla shares will have a much steeper fall going forward as they begin to be priced like other automakers rather than on their promises. He said that for Tesla to meet its growth goals, it must build new factories almost every year, but that new factories in Germany and Texas that opened in the spring are still not operating at full capacity. And he said that the factory in China has had to scale back production due to weak sales in the market in the face of the Covid restrictions.

“Demand in the United States has collapsed,” he said. “Two months ago, your waiting time was two or three months. Now you can get one immediately. They will build more cars than they sell for the third quarter in a row. That is the definition of excess capacity.”

Tesla remains by far the largest electric car manufacturer worldwide, although that title is being challenged in some key markets, by Volkswagen in Europe and BYD in China. And more competition comes from established car manufacturers such as Ford and GM.

That’s not to say Twitter hasn’t played a role in Tesla’s share price slide this year: Tesla shares have lost over 65% of their value since Musk’s interest in Twitter was first made public in April, with a nearly 50% decline since he closed the deal at the end of October.

Investors have been disappointed that Musk appears to be paying for so much of his $44 billion purchase of Twitter by selling Tesla shares. Musk, Tesla’s largest shareholder, has sold $23 billion worth of Tesla stock since his interest in Twitter became public in April.

On a Twitter Spaces call last week, Musk promised he was done selling shares in Tesla ( TSLA ) until at least 2024, if not longer. But he has not lived up to an earlier promise in April that he was done selling Tesla ( TSLA ) stock, selling $14.4 billion of that stock since then.

“It’s been a Pinocchio situation for Musk to say he’s done selling shares. Investors want to see him walk the walk and not just talk the talk, Ives said.