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Stock Watch

Is the downturn in Tesla’s share price a blip?

Tesla share price: Tesla Cybertruck

The Tesla [TSLA] share price closed at $1,081.92 on Friday 26 November, having fallen almost 7% over the course of the week. As the EV maker continues its rollercoaster ride, with CEO Elon Musk selling shares and talking up the competition, can Tesla’s share price get back on track?

Tesla share price buoyed by faithful investors

If any other CEO suddenly announced they were selling $20bn worth of shares in their own company because their Twitter followers told them to, it would likely not only raise investors’ eyebrows but their heart rates, too. However, Elon Musk’s divesting of Tesla stock is just the latest in a long line of sideshows that make it a challenge to predict where the shares are heading. 

In the past month alone, Tesla has been sued by JP Morgan, Cathie Wood-led ARK Invest has reportedly sold around $156m of shares in the firm while maintaining that investment in Tesla is at the core of its strategy, and Tesla bosses have insisted that the company’s main competitors are makers not of electric vehicles (EV) but petrol-fuelled cars. Meanwhile, Musk has been busy polling his Twitter followers about whether he should sell his shares, triggering volatility in the company’s share price, as investors waited to see not only how his followers would respond, but if Musk would listen.

However, look beyond the behaviour of Tesla’s enigmatic CEO, and one trend is clear: investors still back Tesla under Musk. After all, we’re talking about a stock that is up more than 1,200% since January 2020. That said, Tesla has its short-selling critics, such as investor Michael Burry, the subject of Hollywood’s The Big Short, who believes that the company’s business model is over-reliant on government subsidies. 

Musk tweets spark volatility 

On Saturday 6 November, Musk tweeted: “Much is made of unrealised gains being a means of tax avoidance, so I propose selling 10% of my Tesla stock. Do you support this? I will abide by the results of the poll, whichever way it goes.” Regardless of whether the motivation behind the tweet was genuine concern about taxes or because the stock had just hit an all-time high, by Tuesday the poll had wiped 16% off the shares’ value. Musk sold about $9.85bn worth of shares in two weeks, putting him about halfway towards his promised 10%, causing the share price to fluctuate.

Another Musk tweet from the hip prompted last week’s lawsuit from JP Morgan, who claim Tesla “flagrantly” breached a contract signed in 2014 over warrants that allowed JP Morgan to buy Tesla shares if the strike price was below the share price when the warrants expired this summer. 

JP Morgan claims that Musk’s Twitter post in 2018 – in which he claimed he had funding to take Tesla private, sparking volatility in the share price – constituted a “significant corporate transaction” that allowed the bank to adjust its agreed purchase price. Because Tesla’s shares were worth nearly 10 times more when the warrants ended, JP Morgan says that Tesla is contractually obliged to hand over shares or cash, and that not doing so amounts to a default. The amount JP Morgan is chasing — $162m — is relatively small but investors may be more concerned that Musk’s explosive post has soured relations with a bank that partnered it through its IPO a decade ago.

Despite this, Tesla’s stock continues to enjoy the backing of some key names. Cathie Wood’s Ark Invest may have sold a portion of its Tesla holdings to invest $133m in Zoom [ZM] but insists that both companies are central to ARK’s faith in disruptors. Tesla remains the top holding in both ARK Innovation ETF [ARKK] and ARK Next Generation Internet ETF [ARKW], and Wood hinted this week that she continues to back the EV giant as her investment firm tests a new fund with an aggressive strategy she described as “ARK on steroids”. 

Playing down disruption

Tesla is playing down its disruptor credentials, insisting that its main rivals are not EV start-ups but traditionally powered vehicles. Martin Viecha, head of investor relations at Tesla, said this week: “For the past five years, I've been asked some version of ‘and what about all the competitors’ pretty much daily. Well, over 90% of cars sold this year will be ICEs [internal combustion engines].” 

Meanwhile, analysts hold mixed views on Tesla in the wake of the stock’s recent volatility triggered by Musk’s Twitter poll. A poll by CNN Business revealed that 35 analysts offering 12-month price forecasts on Tesla have a median target of $860, representing a fall of almost 25% on the Tesla share price of $1,145 at the close on 30 November, while 41 analysts offered a ‘buy’ rating. Bullish analyst Daniel Ives at Wedbush believes the key for Tesla will be China, which he suggests could account for 40% of Tesla’s deliveries in 2022. Ives raised his share price forecast from $1,100 to $1,400.  

Indeed, China could soon deliver a boost for the company after Musk announced that the Tesla Model S Plaid, which Tesla calls “the highest performing sedan ever built”, is set to launch in China in March.

Ultimately, however, Tesla’s share price may rise or fall based on the actions of Musk himself – and his itchy Twitter trigger fingers.

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