Unravelling The Tesla Share Price Fall

International | May 31 2022

A plethora of negative events has caused the Tesla share price to fall this year, but the company and its founder continue to find support from loyal believers

By Danielle Ecuyer

Tesla’s share price fall in 2022 (at its low down -45% to US$625) has coincided with a plethora of negative happenings.

The selloff may well prove to be noise for the brave investors, who can look beyond Tesla’s controversial Founder and CEO, Elon Musk, and his personal media aspirations and political commentary.

China lockdowns and supply chain problems

Tesla Shanghai has been the beacon of Tesla’s achievements to date. A greenfield leading edge electric vehicle manufacturing hub that represents the stage 2 iteration of facilities after Freemont, according to long-term Tesla shareholder Ross Gerber, co-founder and CEO of Gerber Kawasaki.

The Shanghai production fills demand for not only China’s desire for electric vehicles, but the plant is also a major exporting hub.

Harsh lockdowns cratered production for Giga Shanghai in April, but manufacturing has restarted in late May with a closed loop system (workers remain on site).

Shanghai represents around 40% of Tesla’s total delivery numbers, and the lower contribution will soften the June quarter production results in China, as well as Tesla’s earnings in general.

Twitter circus

Dan Ives from Wedbush Securities, a positive commentator and analyst of Tesla, didn’t mince his words on Bloomberg regarding the proposed US$44bn takeover of Twitter by Elon Musk.

“It (Twitter) has been a disaster from the beginning, and he (Musk) continues to add fuel to the fire.”

Twitter has and continues to be the portal for Elon Musk to communicate with the world, even though his musings can be both inflammatory and provocative.

Musk has always been controversial but loyal followers were happy to look through any transgressions from a self-confessed ‘Aspergers’ sufferer to the genius that was changing the world.

Through an online Zoom interview Ross Gerber stated:

“The more stress that he (Musk) comes under, the crazier he seems and if you want to invest with genius, absolute flat-out genius and you want normal, it doesn’t work that way like that.”

“So, you get on the ride and if you don’t like it, you don’t… You can bitch and moan as much as you want about it, it won’t change one thing he is going to do, and he is going to change the world in ways that I haven’t seen a person do in my life”.

And the latter includes the revered Steve Jobs, says Gerber.

But will the Twitter circus, as Dan Ives declared, leave some “semi-permanent taints” on Tesla?

There is no doubting Musk has become a much more ‘political’ voice on the social media platform, however, contrary to the critics and the naysayers, Gerber retains a different view regarding the impact of the Twitter fiasco on Tesla’s management and culture.

Gerber stated that “the mission is so important to the people who do it, that they do not pay attention to this stuff… the misperception between reality and what we see and read is a gulf and the gulf is gapped through experience.  Tesla management is on a mission, and everyone believes they will succeed.”

On the flipside Gerber highlighted that Elon “burns through a lot of people and it doesn’t attract everyone”.

Linking through the Twitter debacle to an impact on Tesla could well be as short sighted as not looking through the Shanghai lockdowns as a buying opportunity.

Is there smoke without fire?

In early February 2022 the California Department of Fair Employment and Housing announced plans to sue Tesla over racism and harassment of Black employees at the California, Freemont factory.

The lawsuit comes on the back of a US$137m payout to a former Black employee for racial abuse, when he worked at the Freemont factory in 2015 and 2016.

Adding further fuel to the many fires, global ratings agency S&P has dropped Tesla from its ESG index.

Several reasons were cited but one analyst, Rick Mills from newsletter ‘Ahead of the Herd’ makes for some very compelling analysis (see link below).

Musk was recently photographed with the Indonesian President, Jokowi Widodo at Tesla’s Austin, Texas plant.

No one can criticise Tesla for wanting to secure the necessary materials and minerals, but the question needs to be asked at what cost and what is the image Tesla is trying to put out to the market?

Mills’ conclusion raises food for thought: “A company that has shown itself more than willing to make deals with the devil in Indonesia and New Caledonia, shouldn’t be masquerading as an angel when it comes to its environmental practices”.

Putting the headwinds into context

Looking beyond the China lockdowns and the Twitter sideshow, Tesla’s vehicle demand is so strong the company announced it has stopped taking orders, until the 12-month-plus backlogs can be filled.

How the other automotive companies would love to have the same problem.

With the ongoing commissioning of Giga Austin (and Berlin), the stage 3 iteration of the “machine that makes the machines”, Tesla is going to produce the Model Y with the new 4680 battery cell packs, new AMD chip hardware and full self-driving software (FSD) that is expected to reach a new level of autonomy by the end of 2022.

Musk is continuing with the Twitter takeover but has de-risked Tesla with the expiration of the margin loan over his shares for the equity portion of the takeover.

Musk formerly stated after the US$8bn worth of Tesla stock sales that he will not sell more Tesla shares.

Wedbush’s share price target for Tesla shares has been lowered to US$1000 from US$1400 with the lockdown impacts and slower China growth in the second half of 2022 impacting on earnings forecasts, but Dan Ives retains an Overweight recommendation.

Jefferies also cut the price target for Tesla to US$1050 from US$1250 and retains a Buy rating. The broker cited an “uncomfortable pile up of negative news” including China, ratings downgrades, controversial political opinions, and ethical questions.

Credit Suisse, post a visit to the Freemont factory, reiterated its US$1125 price target and reconfirmed its Outperform rating.

General market sentiment is fragile

The economic macro-economic environment remains challenging with the Federal Reserve raising interest rates and starting quantitative tightening.

Talk of global recession remains constant and US stock markets remain fragile as witnessed by sell-offs post weak results and guidance from companies such as Walmart, Target, and Snap, to name but a few.

In a risk-off environment, high multiple stocks remain vulnerable to more selling, including those with large cash positions on the balance sheet such as Apple and Tesla.

The ever-present threat of competition and at times questionable ethical standards, in combination with the major shareholder, Elon Musk raises the risk profile for the stock.

Gerber believes 2022 is like 2019, when the company battled numerous challenges with scaling production of the now so popular Model 3.

For now, the true Tesla believers consider the selldown offers value to a company that is so much more than just electric vehicles; it is energy, battery storage, insurance, software, Robo-taxis and even Optimus, the robot, if one is willing to accept the Musk aspirations.

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To read Rick Mills’ analysis: Stripped of its ESG credentials, Tesla continues to pursue dirty nickel in Indonesia”.

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Danielle Ecuyer has been involved in share investing in Australia and Internationally for over three decades, both professionally and personally and is the author of ‘Shareplicity. A simple approach to investing’ and ‘Shareplicity 2. A guide to investing in US stock markets’.

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