Updated: Mar 13
Ever since it first declared profitability in late 2020, through to its inclusion in the S&P 500 in November, Tesla has been on a seemingly unstoppable bull run. In fact, the past 12 months have proven very profitable for the Palo Alto manufacturer. Production output had soared to 500,000 vehicles per year, almost double what Volkswagen was able to deliver in 2020, and the stock market had taken notice; by year’s end, Tesla had reached an industry-leading market capitalisation of $573.9bn, almost 50% of the total industry value. By January 2021, Tesla stock had surged to record heights ($880) before plateauing at around $850 during the following month. However, Tesla shares today sit just below 600$, after having lost 30% in under a month. What changed during the past 30 days?
POST-COVID-19 ECONOMIC RECOVERY
On March 3rd, FED chairman Jerome Powell announced that the market should brace itself for a 'transitory increase in inflation'. This comes as a result of the influx of liquidity from President Biden’s $1.9tn stimulus plan combined with better-than-expected post-COVID economic recovery. With no sign of imminent rate readjustment, the yield on 10-year Treasury notes shot up to over 1.5%, its highest value since 2019. According to the DCF analysis, a rise in interest rate will lower the present value of expected future cash flows, thereby decreasing investors' willingness to pay for securities, including stocks. As such, Powell’s announcement was met by a global sell-off in the bond-market, and a slump among equities, with the Nasdaq losing 3.5%. Tech stocks were the most hit: Apple dropped 6% day-to-day and Netflix similarly lost 1.3%. Tesla was among the worst performers of the day losing over $254.8bn in capitalisation.
Tesla has been plagued with production issues since its inception. As Elon Musk, Tesla’s founder and CEO, eloquently put it: “Prototypes are easy, production is hard & being cash flow positive is excruciating”. However, as recent vehicle output numbers suggest, the days of manufacturing difficulties seem to be a distant memory. That is until you consider the global shortage of semiconductors, a direct consequence of the increase in demand for computers resulting from the global lockdown. The ensuing scarcity, which according to Qualcomm CEO Cristiano Amonhas will likely last the entirety of 2021, has already disrupted the supply chains of all tech firms, including those within the automotive industry. Indeed, Tesla has already announced that the chip shortage would hamper the production of its electric vehicles during the next 2 quarters. Nevertheless, Tesla is not the only automaker hurt by this deficiency. Volkswagen, GM, and Toyota have all been forced to cut production, and even Ford has had
to slow down manufacturing.
“Prototypes are easy, production is hard & being cash flow positive is excruciating” - Elon Musk, CEO Tesla Inc.
Like Tesla, many other EV producers have started feeling the pressure from this recent sell-off. Industry competitor NIO also saw its share price tumble 24% in just over 1 month. Meanwhile, mainstream manufacturers Volkswagen, GM, and Ford all experienced a rise in share prices as investors acknowledge their EV production efforts. As former Tesla board member Steve Westly stated, “Tesla is not going to be king of the hill in electric forever”, as its market share has been eroding at an increasing pace in recent months. While delivering fewer EVs, Volkswagen has seen its numbers triple in less than one year despite an overall decline in deliveries over the same period. The introduction of the iD3 and the freshly announced Porsche Taycan Cross Turismo have allowed the VW group to take the fight against their Californian competitors. Furthermore, Rivian’s forthcoming IPO represents a real threat to Tesla’s dominance in the market.
Earlier this year, long-time Tesla backer Ron Baron of Baron Fund began a 1.8m share sell-off, despite maintaining that the stock had the potential to grow past $2000. According to Nick Colas, co-founder of DataTrek Research, this move could just be “part of the process” for billionaires like Baron. However, retail investors should take note, as these decisions come after months of planning and billions spent on research. When it comes to Tesla itself, Mr. Colas believes that this dip in stock price comes as a result of the lockdown induced ‘tech-frenzy’ drawing to an end. In fact, over the past year, retail and institutional investors alike pumped millions into Big Tech and in particular Tesla. Now, with normality in sight, investors are looking for new opportunities elsewhere, dragging the price of tech-stocks down.
Rather than a deterioration of company fundamentals, this recent Tesla slump seems to reflect a difficult time for the industry as a whole, with market conditions no longer favouring high-growth tech stocks. Nonetheless, Tesla needs to work towards fending off industry competition and maintaining its status as king of the EV market. This is even more relevant today given the expected surge in demand for electric vehicles in the coming years.
This article was written based upon the facts that unfolded before 8th March 2021. The following day, Tesla shares rebounded, rising over 17% and spearheading the resurgence of Big-Tech as a whole. Many have attributed this bounce back to a slowdown in the sell-off of government bonds combined with the underpriced nature of the stocks themselves.
If anything, these recent developments highlight the prevailing volatility within the market.
Written By Francesco Botto