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The unwavering faith once held by Elon Musk's most ardent supporters in Tesla Inc. is facing a severe test as the electric vehicle manufacturer's stock experiences a dramatic and persistent decline. Even the most steadfast believers, who previously championed Tesla's innovative spirit and Musk's visionary leadership, are now exhibiting signs of apprehension, prompting them to reassess their positions and, in some cases, withdraw from the market. This shift in sentiment highlights the precarious situation Tesla finds itself in, as it grapples with a confluence of challenges, including declining sales, mounting competition, and growing investor unease. The retreat of even the most loyal investors underscores the depth of the crisis and raises serious questions about Tesla's future prospects.
The magnitude of Tesla's stock decline has been nothing short of staggering. As the single largest decliner in the S&P 500 Index this year, the company's valuation has plummeted, eroding investor confidence and sparking widespread concern. The situation reached such a critical point that former President Donald Trump felt compelled to intervene, announcing his intention to purchase a new Tesla as a gesture of support for Musk. While Trump's decision did provide a temporary boost to the stock price, the underlying anxieties and uncertainties surrounding Tesla's performance remain unresolved. The presidential purchase served as a symbolic gesture, but it failed to fundamentally alter the negative trajectory of the company's stock.
Despite the apparent opportunity to buy the dip, many of Musk's most faithful followers are hesitant to dive back into the market and scoop up shares at bargain prices. The pervasive fear is that the bloodbath may be far from over, and that further declines are inevitable. The stock, which has already fallen 52% from its all-time high in mid-December, has effectively erased all of the gains it experienced following Trump's election, when traders were betting that Tesla would benefit from Musk's close ties to the new president. This complete reversal of fortune underscores the volatile and unpredictable nature of the stock market, and the inherent risks associated with investing in even the most promising companies.
Brian Mulberry, client portfolio manager at Zacks Investment Management Inc., which oversees approximately $21 billion in assets, encapsulated the prevailing sentiment when he stated that the stock is currently trading on feelings, with downside pressure dominating. He predicted that the stock could easily fall to $200 or even lower in the short term. Although Zacks held a significant number of Tesla shares as of December 31st and Mulberry anticipates a potential rebound in the stock price next year, he is currently adopting a cautious stance and remaining on the sidelines. His decision reflects a broader trend among investors who are reluctant to expose themselves to further losses in the face of persistent uncertainty.
Mulberry is not alone in his apprehension. As the stock price dipped below $230 this week, a significant drop from over $400 less than two months ago, Wall Street analysts, including some who previously maintained a buy recommendation on the stock, have adopted a more cautious approach. Over the past week, at least four analysts lowered their price targets for Tesla, while two other long-term bullish analysts cautioned about poor sales and negative sentiment. This widespread shift in sentiment underscores the severity of the challenges facing Tesla and the growing skepticism among industry experts.
One of the few sources of support for Tesla's stock has been the retail traders, who are among Musk's most devoted fans. These small investors have, on net, purchased $2.8 billion worth of Tesla stock since last Tuesday, according to Emma Wu, a global quantitative and derivatives strategist at JPMorgan Chase & Co. However, even within this group, there are signs of growing concern. The author of one of the top posts on Tuesday on the Reddit forum for Tesla traders confessed, "I keep holding but at this point I'm beginning to doubt my decision." This candid admission highlights the emotional toll that the stock's decline is taking on even the most committed investors.
The fundamental problem confronting investors is the lack of any significant events on the horizon that could potentially improve sentiment. Updates on Tesla's fully self-driving car or its robotaxi are not expected in the near future. Furthermore, Musk's preoccupation with the Department of Government Efficiency has raised concerns that he is too distracted to effectively manage his car company. These concerns are compounded by the current Republican administration's strong opposition to electric vehicles, which poses a threat to demand in the United States. Tesla's sales are also declining globally, with concerning reports emerging from China, Europe, and Australia. In many regions, Musk's growing involvement in global politics is perceived as damaging to the company's brand.
The drastic decline in Tesla's stock has prompted several analysts to lower their first-quarter delivery estimates. Joseph Spak of UBS warned on Monday that current profit expectations are looking excessively optimistic. While these concerns have been weighing on Tesla shares since the beginning of this year, the stock's decline accelerated significantly as the broader appetite for risk diminished over the past couple of weeks, fueled by growing uncertainties surrounding Trump's trade policies and fears of an economic slowdown.
Adam Sarhan, founder of 50 Park Investments, observed that Tesla is now acting as a proxy for the Trump trade, suggesting that the stock's performance is intertwined with the broader market's perception of Trump's policies. He warned that unless the market is willing to reward Trump and Musk for their efforts, the stock will continue to decline, adding that there is currently no floor in the stock. This assessment underscores the precarious position that Tesla finds itself in, as its fate is increasingly tied to factors beyond its control.
The tables have turned dramatically for Tesla. Following Trump's election in November, Tesla shares rapidly became the largest beneficiaries of that victory in the equity market. The stock surged by more than 90% in just over a month, despite the fact that the outlook for the company's business continued to worsen. This divergence between market sentiment and underlying business fundamentals highlights the speculative nature of the market and the potential for rapid reversals.
Even after the retreat of the Trump wave, Tesla is still trading at a significantly higher multiple than its mega-cap peers. The shares were trading at 75 times forward earnings as of Monday's close, compared to an average of 25 times for the so-called Magnificent Seven stocks. The average S&P 500 member trades at around 20 times earnings. This elevated valuation makes Tesla particularly vulnerable to selloffs, as investors become more risk-averse and seek to reallocate capital to more attractively valued companies.
The steep valuation and Tesla's popularity among risk and momentum traders render the stock susceptible to drastic selloffs, but they also imply that any potential recovery, when it eventually occurs, could be swift and massive. For now, however, even the most ardent bulls are struggling to find reasons to remain optimistic.
In the options markets, the majority of activity is driven by investors seeking to hedge against further losses, with put options trading at the highest level relative to bullish call options since the volatility shock in early August. One-month implied volatility on Monday reached its highest level since the end of 2022, when shares had slumped to near $100. Both skew and volatility rebounded slightly on Tuesday, coinciding with a modest increase in the stock price.
Mark Newton, head of technical strategy at Fundstrat, and a long-term bull on Tesla, acknowledged that the stock is currently in a freefall, making it difficult for those with short-term time horizons to buy the dips. However, he cautioned against attempting to time the market, warning that those who try to sell quickly and buy back in a few days are playing a dangerous game. This advice highlights the inherent challenges of navigating volatile markets and the importance of adopting a long-term investment perspective.
Source: Even Elon Musk fans dash for the sidelines with Tesla in freefall