Tesla’s Tough Tuesday: An 80 Billion USD Market Capitalisation Decline

Since listing 10 years ago, Tesla experienced its worst trading day on Tuesday, 8th September – with shares down 21% to close at 330.21 USD. The business witnessed a decline in market capitalisation of more than 80 billion USD; the remaining 310 billion USD, however, still leaves Tesla as the world’s most valuable automaker. On Tuesday, Tesla was the worst performer of any NASDAQ 100 component, despite being one of the best performing US stocks this year and gaining 52 billion USD in a single day at the end of August. These volatile price movements have left many investors confused and seeking explanations.

 

A suggestion for the decline involves Tesla’s lack of inclusion in the Standard & Poor’s 500 Index (S&P 500), an index indicating America’s largest 500 companies. This came as a surprise to some investors as the company has met many eligibility requirements, including a market capitalisation minimum and a history of profitability. Despite having a market capitalisation much higher than other S&P 500 components, profitability is being questioned as Tesla posted its first annual operating profit in 2019. However, the company did reach the desired target for the S&P 500 as it turned a fourth consecutive quarterly profit in the three months to June 30. Explanations as to the lack of inclusion have included suggestions the index committee may have been cautious of the company due to the volatility of its stock price (it had increased by almost 500% from January 1 to August 31). By being excluded from the index, some portfolio managers that mirror the S&P 500 have resultantly sold Tesla shares in return for the newly added companies. These companies included Etsy (25 times smaller on a market cap basis than Tesla), Teradyne (TER), and Catalent (CTLT).

 

Potential alternate factors include Tesla’s largest external shareholder, investment manager Baillie Gifford, cutting its stake from roughly 6.4% to 4.3% to protect its clients from over-exposure to the company. This could have triggered other investors to lose confidence, resulting in a herd-like response. Additional actions performed the previous week include the completion of a 5 billion USD share sale and a five-for-one stock split. A stock split intends to make the price per share decrease without changing market capitalisation. Consequently, shares are more attractive to smaller investors and may encourage increased purchasing of stocks. Similarly, as Tesla is often considered a technology stock, the wider sell-off of tech stocks (shares such as Facebook, Apple, and Microsoft fell between 3.7% and 6.7%) may have contributed to Tesla’s share price movements.

 

Similar to Tesla’s historically volatile share price movements, such as 19% and 17% drops on March 16 and February 5 respectively, the stock seems to be rebounding. On Wednesday, the stock jumped roughly 10%, increasing market capitalisation by 32 billion USD – it appears investors are viewing the stock split as an opportunity to buy stocks at a more accessible price. Broader market appetite for technology and growth stocks has now resumed as the NASDAQ index shows signs of recovery for Apple, Amazon, and related tech companies. Consequently, there has been overall bullishness for stocks like Tesla.

 

With Tesla’s Battery Day event coming up on September 22, UBS have doubled their price target for Tesla shares from 160 USD to 325 USD. UBS states that Tesla is expected to announce battery-cell innovations that increase energy density by around 50% by focusing on dry electrode technology. Subsequently, cell costs could decrease by 2300 USD per vehicle over the next three years. Additional updates to the Tesla Model S and Model X, such as a new version that includes the cell, may also drive share prices higher. Compared to Tesla’s current state, the investment bank predicts greater sales volume, stronger margins, and higher average revenues per vehicle.

 

Even when taking into account Tuesday’s price decline of 21%, Tesla still trades at almost 350% of its beginning of the year value. By being perceived as a technology name and autonomous vehicle company, Tesla will continue to be affected by both markets, thus suggesting that a more volatile price movement is to be expected. Questions now arise as to whether the company can continue to maintain its growth and support its valuation, as well as the extent to which innovations (such as the new battery cell) will persist and encourage general public adoption of electric vehicles.

 

By Esther Campbell

Senior Editor: James Float

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