Why Tesla’s week to forget was the anchor that weighed on the S&P 500

The EV maker's stock plunged 16% and has been further battered by disappointing quarterly deliveries and Elon Musk’s surprise decision to revive his Twitter buyout offer

Despite its recent stock market performance, Tesla’s dominant position in the nascent and fast-growing electric vehicle market makes it difficult to bet against. AP

For all the stock market gyrations this week, one company’s performance stands out beyond all others: Tesla.

The electric vehicle maker's stock has plunged 16 per cent over the five sessions, marking its worst week since March 2020s Covid-stricken market sell-off.

Meanwhile, the S&P 500 Index recorded its best week in a month, closing up 1.5 per cent on the strength of powerful rallies on Monday and Tuesday. Tesla was by far the biggest weight on the S&P this week, knocking about 13 points off the index.

The EV maker’s issues are no secret. It has been battered by the one-two punch of disappointing quarterly deliveries and chief executive Elon Musk’s surprise decision to revive his offer to buy social media platform Twitter.

The Twitter deal comes with the possibility that Mr Musk will be forced to sell Tesla shares to finance the deal.

For ardent Tesla fans like ARK Investment Management’s Cathie Wood, the sale offers a chance to buy more of the stock at its cheapest price in months.

The growth-stock guru, whose funds have been hit hard this year amid soaring inflation and rising interest rates, snapped up shares worth about $32 each on Monday.

Mom-and-pop traders were also big buyers, with nearly $540 million in net purchases over the past five trading days, Vanda Research said.

However, there are more cautious investors, who say the stock has several hurdles to navigate before finding a clear runway. A looming recession, growing threat of competition, a wary consumer squeezed by high inflation and the stock’s expensive valuation are the biggest worries.

“Will Tesla’s stock retain a halo effect and prosper while other high growth, high valuation stocks suffer? It hasn’t so far this year,” said Catherine Faddis, chief investment officer of Grace Capital.

Mr Musk’s purchase of Twitter adds a few more wrinkles. In addition to the uncertainty around the deal’s financing, investors are also worried that the billionaire could be pushing himself beyond his limits with so many demanding ventures.

“Musk will need to ‘justify’ the valuation he paid for Twitter by generating value as soon as possible, this will take his time and focus away from running Tesla,” said Brian Mulberry, client portfolio manager at Zacks Investment Management.

“Musk may be a genius businessman, but he is still a human being and a day is still only 24 hours long.” Zacks owns Tesla stock through its All-Cap Core fund.

The Tesla Semi, a new electric lorry, is expected to cost $180,000. Reuters

The battery-powered lorry on display at the Tesla Giga Texas manufacturing plant in Austin, Texas, in April 2022. AFP

Tesla chairman and chief executive Elon Musk unveils the the Semi electric lorry in Hawthorne, California, near Los Angeles. AFP

Mr Musk has described electric lorries as Tesla’s next effort to move the economy away from fossil fuels. Reuters

The Tesla Semi has a range of 805 kilometres. Reuters

Tesla has begun to produce the electric lorries and Pepsi will receive the first deliveries from December 1. Reuters

Tesla chief executive Elon Musk. Reuters

Meanwhile, even with this sell-off, Tesla continues to tower over Big Tech and most of the S&P 500 with its valuation. Tesla shares are trading at 51 times the company’s estimated forward earnings. By comparison, the S&P 500 trades at an average of 16 times, and Apple trades at 23 times.

All that being said, there is a reason why Tesla has such a lofty valuation: it is about the future. Tesla’s dominating position in the still nascent and fast-growing EV market makes it dangerous to bet against, particularly in a global economy that will soon be powered by green energy.

And Mr Musk, for all the distractions pulling at him, is committed to making the company a success.

“Tesla is unique among US big tech right now because it has a much clearer fundamental growth trajectory than any other name. It also has the largest ‘key man’ risk of any stock in the S&P 500,” said Nicholas Colas, co-founder of DataTrek Research. “Musk’s attention to Tesla is worth a lot to many investors.”