Tesla started the year at a share price of nearly $400 and closed trading on 26 Dec 2022 at $123.15. This is a nearly 69% decline. Tesla has also fallen nearly 20% in the past 5 days and nearly 33% in the past month. In contrast, the Nasdaq has fallen 2.7% and 7.2% in the past 5 days and past month.
The steep recent decline has prompted Elon to quickly make a comment saying he will not sell any more Tesla stock for another two years and shares quickly rose nearly 3% in after hours trading.
Although Elon has previously made promises about not selling Tesla stock before reneging, this could still be taken positively as a sign that the bulk of the selling has been completed.
Here we look at reasons why Tesla is down so much this year, discuss whether Tesla’s long term growth story is still intact and what investors can do.
1) Tesla’s valuation is high
Investors still put a valuation premium on Tesla compared with its peers in the automotive industry. Although Tesla’s market cap is no longer larger than five of its peers added up at $424 billion, Tesla’s market cap of $395 billion is still pretty hefty.
When looking at the table above, Tesla’s price to earnings ratio of 35.4 times and price to sales ratio of 5.3 times is still substantially higher than Ford, GM, Toyota, Mercedes, and Volkswagen.
2) Weakening consumer demand
Tesla began to offer US$7,500 discounts and 10,000 miles of free supercharging on new Model 3 and Model Y cars in the US in an effort to encourage customers to take deliveries.
The car has to be delivered between by 31 Dec 2022, meaning that the company is probably trying to boost sales before the end of the quarter. The price cuts on Tesla’s Model 3 sedan and Model Y crossover are seen as a sign of weakening demand.
Tesla is also offering credits of CAD$5,000 (US$3,670) in Canada and MXN$74,750(US$3,820) in Mexico. Tesla previously cut the price of cars in China in October by about 9% or 14,000 Yuan.
A price cut is a tell tale sign of weakening consumer demand globally. With market expectations of an impending recessions coupled with China’s repeated lockdown, large consumer spend have fallen significantly as consumers become more prudent.
3) Tough competition
As a growth industry, the dynamics of the EV industry changes rapidly with new entrants and new models entering the markets. There are also many companies that are in the research and development stages and some have even held pre sales for EVs even before a single vehicle has rolled off the production line.
Looking at the two charts below, we note that when comparing 1H22 to 1H21, global total EV sales increased by 62%, however Tesla’s sales volume growth was 46%, this means that on a global basis, Tesla is losing market share.
4) Elon has sold a lot of shares
Elon has sold about $39 billion of shares this year. He has sold them for a range of reasons, to raise funds to pay for his tax liabilities, to fund SpaceX and for the acquisition of Twitter. He has also explained that he recently sold some stock to prepare for worst-case scenarios at Twitter this year.
Elon had about 128 million in share options awarded over the last decade and analysts estimate that he has only 11 million share options remaining unvested. This could be why he announced that he would not sell anymore shares in the next 2 years.
5) Elon is distracted
Elon is the CEO of Tesla, Twitter and SpaceX. Although much has been said about Elon’s ability to multitask and run three large companies with little sleep, investors have raised concerns that with Twitter, this is one too too many distractions on his plate and that he cannot meaningfully focus on Tesla.
6) Tesla also has problems
Besides the perennial covid related lockdowns in China affecting Tesla’s production output, apparently there are also production engineering challenges in the US, slowing output. The Tesla Cybertruck has also faced delays, changes in prices and specifications.
Is Tesla’s long term growth story still intact?
Tesla’s growth story is probably still intact with its plans to move more toward robotics, battery storage systems, electric semitrucks, and other new revenue streams.
Tesla also is close to picking the location of its new Gigafactory. Tesla could announce the construction of a Gigafactory in the northern Mexican state of Nuevo Leon as soon as Friday, with an initial investment of nearly$1 billion.
The EV industry also has structural tailwinds that are intact which would underpin Tesla’s growth.
What can investors do?
With Tesla already down 69% this year, investors might be keen to start a position in Tesla. After Tesla’s stock splits, 1 share of tesla is only trading at $128 now which makes options a feasible strategy.
Each option contract represents 100 shares and hence 1 option in Tesla would require approximately $13k.
Bullish view
1) For investors who do not have shares in Tesla, one may consider writing put options at strike prices that are below current market prices, and should the share fall below the strike price, the option is assigned and the premium received would decrease the total cost of purchasing the stock.
2) For investors who are already holding at least 100 shares in Tesla, a covered call strategy can be carried out
3) As the cost of an option is lower than the cost of the share, one could potentially gain or increase exposure to Tesla via a call option, especially if there is a view of a swift recovery
Bearish view
1) For investors who do not have shares in Tesla, one may consider writing call options or buying put options.
2) For investors who already have a short exposure to Tesla, returns can be enhanced writing put options.
But before taking a view on Tesla, one must be aware that Tesla is a highly traded and volatile stock and may not be suitable even as a long term holding for many investors let alone a short term one.
