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The great reversal for the Tesla share price

The Tesla [TSLA] share price fell 15% over the week to 12 November to $ 1,033 after founder Elon Musk (pictured above) offloaded up to 10% of his own shares in the tech giant.

He sold 6.36 million shares during the week worth $6.9bn, and has another 10 million to sell to meet a 10% pledge. By 16 November, Musk raised $7.8bn selling shares.

The news came following the results of a Twitter poll on 6 November. In it, Musk asked his social media followers: “Much is made lately of unrealized gains being a means of tax avoidance, so I propose selling 10% of my Tesla stock. Do you support this?”

The majority, 57.9%, said ‘yes’, and Musk promised to abide by the decision, but there is more to the sell-off than Musk’s legendary Twitter mischief.

 

 

Tax bills

Musk knew before the poll that some of his shares had to be sold to satisfy tax obligations related to 23 million stock options granted in 2012 that have now vested, and are due to expire in 2022, reported Tip Ranks.

“With a tax bill that we calculate at north of $10bn, selling stock before year-end is not a surprise,” Wedbush analyst Dan Ives told Tip Ranks, adding: “He is likely on pace to complete his 10% ownership stock sale over the coming days.”

Even though a sell-off was expected, it was the size of it which seems to have spooked markets. Wall Street thought Musk would only sell around 5-6% of his shares. So, if he goes for the whole 10% will that mean a bigger share price reversal?

The higher amount has given “fuel to the bears” but is a “digestible number,” Ives told Tip Ranks, and was likely to “remove an overhang”.

Tesla is a stock which has had a stellar last few months, with its price rocketing around 80% since mid-May. It’s been boosted by growing consumer and corporate interest in electric vehicles (EVs) as net zero carbon emissions targets loom into view. One example of this growing demand was a deal with car rental giant Hertz [HTZ] to supply 100,000 Teslas by the end of next year.

Ives is confident these growth fundamentals remain.

 

Analysts bullish on Tesla share price

Ives expects Tesla to retain its position as the main force driving future EV take-up, and has maintained an ‘outperform’ rating and a $1,100 target for Tesla’s share price.

Bank of America has a ‘neutral’ rating and a $1,200 target for the Tesla stock, with analyst John Murphy confident the EV market opportunity is strong enough to cater for “multiple players to compete profitably”, reported Business Insider. Murphy added that Tesla will also benefit from widely available and cheap capital to aid investment.

$1,200

Bank of America's target price - its analysts gave Tesla a 'neutral' rating

 

Cathie Wood of ARK Invest has been paring down her company’s stake in Tesla over recent months to around 10%. However, Wood has refused to buy the new Tesla dip and is instead waiting on the next big “aha moment” when we “see some success on [Tesla’s] full self-driving autonomous front”. Ark has a five-year $3,000 price target on the stock and is unlikely to plug out of the stock now.

According to Market Screener, a consensus of 34 analysts has an outperform rating on the stock, but a significantly smaller price target of $835.44. In short, they believe Tesla is overvalued.

 

Sell or buy?

Lew Piantedosi, director of growth equity at Eaton Vance, recently told the Wall Street Journal that the run-up on tech stock valuations feels like the dotcom bubble of the late 1990s. “Tens of billions of dollars of market cap being created on no news or incremental news,” he said.

“Tens of billions of dollars of market cap being created on no news or incremental news” - Eaton Vance Director of Growth Equity Lew Piantedosi, per Wall Street Journal

 

Higher inflation and interest rates could batter the Tesla valuation in the months ahead. There have also been safety concerns around its self-driving cars and the recent IPO of rival Rivian [RIVN], on 9 November, giving another option for investors.

However, Tad Park, CEO of Volt Equity, plans to ride out the volatility. Volt holds Tesla in the Volt RoboCar Disruption and Tech ETF [VCAR] and has seen its share price fall 12% since the start of the month. But as Park told the Wall Street Journal: “We really focus on trying to pick winners.”

However, the worry about Musk remains. Russ Mould, investment research director at AJ Bell, said: “He is so rich that he probably doesn’t care if his actions cause the Tesla price to fall a bit. However, he also has a duty to act in shareholders’ interests because the incident has already destabilised the company’s valuation.”

It’s hard for investors to tell what Musk and Tesla will do next, but it is an entertaining ride.

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