(Noted News) — Tesla (TSLA), the world’s most valuable automaker, lost 21% of its share price and $82 billion of its market cap on Tuesday as the 2-week-long tech sell-off continues.
Though Tesla’s plunge a falls in line with the broader tech sell-off, one may correlate it with it’s recent unexpected rejection from the S&P 500 index.
On Friday, S&P Dow Jones Indices, who’s in charge of the makeup of the index, didn’t mention Tesla when they welcomed Etsy Inc, tech firm Teradyne, and pharmaceutical company Catalent into the S&P 500. These companies replaced H&R Block, Coty, and Kohl’s.
Given Tesla’s 4th consecutively profitable quarter, and a market cap that dwarfs many companies already on the S&P 500, many investors were expecting Tesla to be a shoo-in for the index. However, Elon Musk and Tesla will have to wait another day for induction into the iconic index, potentially until it’s stock price calms down volatility-wise and finds a predictable range for a quarter or two.
Tesla’s stock price bottomed at $70 during the Covid Crash of March 2020, and then immediately went on a parabolic bull-run to $500, so regardless of any fundamentals, a 21% correction after a 600% rally is not exactly shocking for most investors. Prior to the recent stock plunge, Tesla was trading at nearly 160 times earnings, creating what veteran investment researcher David Trainer referred to as the “most dangerous stock on Wall Street”
“Whatever best-case scenario you want to paint for what Tesla’s going to do – whether they’re going to produce 30 million cars within the next 10 years, and get in the insurance business and have the same high margins as Toyota, the most efficient car company with scale of all-time – even if you do believe all that is true, the stock price is still implying that profits are going to be even bigger than that,” Trainer said in an interview with CNBC.
Trainer said he expects Tesla to eventually erase 90% of its stock value, putting it at a fair price of $50, citing Tesla’s relatively low car sales and share of the electric vehicle market in Europe.
“Tesla doesn’t rank in the top 10 in market share or car sales in Europe for EVs and that’s because the laws changed in Europe that have strongly incentivized the incumbent manufacturers to crank up hybrids and electric vehicles. The same is coming in the United States. I think realistically we’re talking about something closer to $50, not $500, as a real value.”
At the very top of the rally was Tesla’s 5-for-1 stock split, and a hasty completion of a $5 billion stock sale. Tesla’s largest stakeholder, American investment firm Baillie Gifford, announced a reduction in their stake from 6.4% to 4.3%, citing difficulties in distributing the weight of a single stock in their clients’ portfolios.
Not all have turned bearish on Tesla, however. On an episode of “Trading Nation” from CNBC, Todd Gordon from Wealth Ascent Partners said whether investors are bullish or bearish on Tesla depends on if they consider it a car company or a general technology company.
“The main difference between how bulls and bears view Tesla is whether they value it as a traditional auto company or a technology company. If you’re trying to assign valuation on Tesla based on the conventional automobile industry, of course the stock is going to look expensive. We don’t see Tesla as an auto company but more as a ‘technology on wheels’ kind of company.”
Gordon also named China’s welcoming of Tesla into their market, which is the largest automobile market in the world, as a reason to stay long term bullish on the stock price.
“There’s a strong sort of embrace for electronic vehicles in China, which … is the largest auto market in the world. Tesla remains by far the most popular company there despite local competition”
Tesla’s stock price was trading at $350 during premarket on Wednesday morning.