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Musk breaks the spell he had woven around Tesla

For much of this year, as other growth stocks collapsed, Tesla appeared to defy gravity. The bulls complained that shares in Elon Musk’s electric carmaker were suffering because of his offer for Twitter. But as recently as three months ago, with the stock down only 25 per cent from its November 2021 high, it was still possible to believe that it would escape the worst of the carnage.

Not anymore. A gruesome December has sliced more than 40 per cent from Tesla’s shares, leaving them two-thirds lower than their level in late September. Before a partial rebound early on Thursday, Tesla’s stock market value had dropped to $355bn, a staggering fall of nearly $900bn from its 2021 peak.

It is easy to find reasons for this sell-off at a time when growth is out of fashion on Wall Street and the auto industry is facing an uncertain 2023. But Musk himself must take some of the blame. Whether out of hubris, carelessness or just boredom with his day job, his personal missteps have served as a catalyst for the decline.

One is the mismanagement of his own outsized public persona. Musk likes to claim that his presence on Twitter has been of immeasurable value to Tesla shareholders. On the way up, he had a point. It was a megaphone that helped cement him in the public consciousness as the world’s foremost maverick entrepreneur, even if it brought unpleasant public spats and a run-in with regulators.

But as he has stoked chaos and polarisation at Twitter in the two months since the takeover, his personal brand — and, by extension, that of Tesla — has been tarnished.

A second misstep was to take the company’s elevated stock for granted. Turning his attention to Twitter at a moment when the auto industry seems on the brink of a downturn, and as serious competition in electric vehicles finally starts to mount, looks like seriously bad judgment, even if it turns out only to be temporary.

Musk also seems to have believed that he could treat his Tesla stock holdings like a piggy bank. He started selling two days after the stock peaked and has gone on to dispose of just under $40bn worth of his shares, continuing the sales even after he said he would stop (a comment he repeated last week). With his current stake in Tesla now worth $51.7bn, the disposals look significant.

Actions like these help to explain how the stock market spell that Musk managed to spin around himself and Tesla has been broken. And where emotion has retreated, rational analysis has stepped in to provide ample justification for a savage re-rating.

For many, it has been possible to believe that Tesla was on the brink of capturing the lion’s share of a giant new electric vehicle market that was about to open up. But as Musk warned on Twitter last week, higher interest rates and an uncertain economy point to a rough period ahead. With customer waiting lists falling sharply in Tesla’s two biggest markets, the US and China, the durability of demand has replaced supply for the first time as the uppermost concern for the company’s investors.

Tesla had already warned in October that inventory levels were likely to rise further this quarter as production outstrips deliveries, and that profit margins would be under pressure again. This month it started offering incentives of $7.500 for anyone taking delivery of a Model 3 or Model Y before the end of the year.

All this comes as Tesla gets closer to the crossroads that all growth stocks reach eventually. Sustaining the rapid expansion that Musk has promised is starting to look challenging without taking action that will eat into the profits Wall Street have now come to expect.

Over the past two years, the 30 per cent gross margin on Tesla’s automotive operations (at least, until higher costs crept in this spring) was roughly double the likes of Ford and General Motors, and comfortably above Toyota’s 19 per cent. Seeking to sustain margins could eat further into the growth stock valuation that still supports the company, even after the slide.

None of this detracts from the incredible success Tesla can point to as it ends another year of growth that other carmakers could only dream of. But a stock market value that is double Toyota and a share price at 30 times this year’s expected earnings still leaves room for further disappointment.

richard.waters@ft.com

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