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Stocks

Why Is Tesla Stock Dropping?


June 14, 2021
Why Is Tesla Stock Dropping?

Tesla stock weakened after the electric vehicle maker indicated that it failed to meet its forecasts for deliveries. The company plans to reduce the price of electric vehicles in the United States by $2,000. This price reduction will apply to Model 3, Model X, and Model S electric cars. At the beginning of the US trading market, ‘Tesla stock reduced by almost 8%,’ according to Market Watch.

A Short History of Tesla

Tesla entered the global market in 2010 and is currently the leading electric carmaker worldwide. Back then, it offered 13.3 million Tesla tech stocks at $17 for every share, as denoted by Tech Crunch. Presently, Tesla’s stock price ranges at $600, according to Market Watch.

With a market capitalization value of $588 billion, Tesla is the world’s largest electric car maker. It beats its competitors, such as Daimler AG, with a considerable margin. Most individuals thought the company’s dream of manufacturing 500,000 electric cars by 2020 was unachievable. The truth, however, is that this valuable automaker almost actualized the dream as they produced 499,647 vehicles.

Top Reasons Why Tesla Stock Dropped

Tesla tech stocks, one of the newest in the stock market reduced to a new low,’ said CNN Business. On January 26, 2021, the company’s stock recorded a high of $883, and they have not reached that feat ever since. As said above, the company stock direction declined because the price ranges at $600.
The steep reduction in stock price means that Tesla’s shares are way below what they recorded after entering the S&P 500 on December 21, 2020. The company’s reduced stock price also knocked Elon Musk, the chief executive officer, into the second position in the world’s richest person’s list, behind Jeff Bezos, the Amazon founder. The two regularly exchanged the best and the second-best positions throughout 2020.

Tesla stock drops for various reasons:

Bitcoin Investment

As the largest electric automakers globally, Tesla announced they would invest $1.5 billion in Bitcoin (BTC), as indicated by CNBC. That investment alone helped the company earn an estimated profit of $1 billion, which was a record high as they had never made such profits before by selling cars in a financial year.
On February 20, 2020, Musk tweeted that the price of BTC and another cryptocurrency named Ether seemed high. The tweet made Bitcoin’s price drop by 9.3% at the start of the following week. In addition, this tweet may have led to the reduction of Tesla shares in the stock markets.

Increased Competition

Several auto industry leaders have lately outlined ambitious goals for their electric cars. For instance, General Motors invented an SUV model of a Chevrolet Bolt. They valued it at a lower price than Tesla’s Model Y. General Motors also plans to produce electric cars by 2035. Ford, on the other hand, as one of the largest automakers in the world, has a bigger objective of going all-electric by 2030. These competitor plans are turning out to be the biggest signal for Tesla investors to become nervous.

Model Y Pricing

After reducing the price of Model 3 and Model Y vehicles by $2,000, their new respective prices became $34 590 and $38 490. However, the new cost of Model 3 disappeared after a week from the company’s website without any explanation. “The price reduction indicates a decline in demand for Tesla cars,” said Gordon Johnson, a researcher at GLJ.

Investors Went Ahead of Themselves

Tesla shares rose a day before their sudden drop. The revenue generated from the sale of environmental credits and regulatory credits to other car manufacturers surpassed the overall net income. “There is proof that Tesla finds it difficult to generate income by manufacturing and selling EVs,” said Gordon Johnson, a Tesla critic.

Elon Musk talked about the semiconductor shortage, chip shortages, and a scarcity of the supply of batteries during the earnings conference that happened on January 27, 2021. Musk denoted that the deficit derailed the company’s plans to manufacture more cars. In the consequential market news, Tesla CEO said that the company could have already started generating electric semi-tractors if the batteries were available.

Should Traders Invest in the Dropped Tesla Shares?

For investors to understand what is happening in the company, they need to get detailed info about what the company is and what it isn’t.

Tesla Isn’t:

  • Heavily Shorted Previously, NASDAQ listed Tesla as one of the leading shorted stocks. In 2018, for instance, Tesla’s CEO mailed a pair of shorts to the New York hedge funds. In the story, the writer continues to say that Musk also sent shorts to the famous Securities and Exchange Commission. Later, Elon Musk listed and sold the short-shorts from Tesla’s website at $69.420, according to Cnet. Currently, “Tesla has a short interest that’s below 6%,” said Barrons.
  • At Risk of Becoming Bankrupt Any Time Soon
    The leading reason people heavily shorted Tesla previously is that the company was at risk of running out of future cash flows. However, after the rise in Tesla’s share price, Tesla increased its capital, which led to an increase in bond yields. So, liquidity and the company’s rich valuation are not a worry anymore to the investors.

Now, Tesla is:

  • A Low-margin, Capital Expenditure BusinessThere are limited businesses that investors can screw up worldwide. These types of companies, which include Roth Capital Partners, require little to no capital to operate. On the other hand, Tesla is the opposite of these organizations since they have low margins and high labour needs, and fixed expenses. So, they need to invest billions of dollars in competing with the other 5 ultra-popular stocks, such as Amazon, Shopify, Alphabet, and Chipotle Mexican Grill.After assessing Tesla’s weekday evening cash flow statement, it’s worth noting that their capex is usually larger than their amortization and depreciation. This translates to aggressive business strategy and aggressive accounting. Another signal for stock regarding Tesla is that the profit they made from Bitcoin was higher than the revenue earned from the sale of vehicles in the preceding year, as said earlier.
  • A Leader in InnovationElon Musk is a genius for the automotive industry as he initiated the transformation of vehicles from combustion engines to electric motors. Due to this, Tesla has a high stock valuation at Dow Jones and IBD Stock Checkup compared to its revenue based on mere popularity. The only issue, however, is that Tesla is not the only manufacturer producing electric cars.More and more manufacturers joined the innovation. Therefore, Tesla needs to invest much more if they want to remain the industry’s best electric vehicle manufacturer, in addition to having a considerable stock market share.
  • Factors that Affected Tesla Shares PriceA share’s price primarily relies on the investors’ attitude towards the issuing company. Amongst the crucial aspects that impact the price of a given stock are the anticipations regarding the results of the company. This way, the demand for Tesla’s stocks comes down to the experts’ predictions regarding the company’s potential profits or losses. All in all, a company can increase its stock value by acquiring additional assets.

Disclaimer: This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances or needs.

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Categories: Stocks

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