Why Is Tesla Stock (TSLA) Plunging?

Since the start of the year, shares of Tesla have tumbled 64% and just since the start of the month, they’re down 36%.

(You’ll find the text version of “Why Is Tesla Stock Plunging” below this embedded video)

Tesla stock (TSLA) is in an absolute free fall. What’s going on?

Since the start of the year, shares of Tesla have tumbled 64% and just since the start of the month, they’re down 36%.

That’s a monster drop.

But you can’t make sense of the decline in TSLA without first understanding where it’s coming from. This is a stock that rocketed into the stratosphere during 2020 and 2021.

From the start of 2020 to when it peaked in November 2021, Tesla stock soared nearly 15-fold. A $10,000 investment would have turned into almost $150,000.

But that’s not all. At its peak, Tesla was worth $1.2 trillion, making it the sixth-most-valuable company in the world.

Three Components of the Surge

Why did Tesla stock go up so much? To answer that question, I think it’s helpful to break the value of Tesla’s stock into three components.

One is the intrinsic value of the business itself. Tesla is a pioneering electric vehicle company. The firm is widely credited with driving the development and adoption of EVs, while inspiring other automakers to develop their own electric vehicles.

The company took major risks to get to where it is today. In fact, Tesla was reportedly on the brink of bankruptcy as recently as 2019. But Elon Musk was able to turn things around for the company, and in the process, bring electric vehicles into the mainstream.

As you can imagine, valuing an early-stage growth company in a brand-new industry—like Tesla—is extremely difficult. If things had gone wrong, Tesla stock could have fallen to zero. But fortunately, things worked out and Tesla became the clear leader in an industry that is disrupting the massive automobile market.   

Between 2020 and 2021, as Tesla almost tripled the production of its vehicles and generated more than $10 billion of profits, the stock took off.

For Tesla’s stock to go up was a completely rational reaction to Tesla’s business becoming stronger and more profitable.

But to go up is one thing; to become the sixth most valuable company in the world with a $1.2 trillion market cap is something else entirely. There was another factor that drove Tesla stock to those insane heights—the Covid Bubble. 

After Covid hit in early 2020, the government unleashed a tsunami of stimulus—everything from sending people thousands of dollars in cash to cutting interest rates to zero.

That combined with the unique circumstances of the pandemic, where millions of people stayed home and began trading stocks for the first time, led to an asset price bubble.

The Covid Bubble sent prices for everything in the stock market through the roof, but high growth stocks went up the most. Stocks of electric vehicle makers were especially hot.

Rivian, a competitor to Tesla, was briefly given a ridiculous $150 billion valuation by the market after it IPO’d in November 2021, even though the company had only built 1,000 vehicles over that entire year.

The Covid Bubble turbocharged the rally in Tesla stock between 2020 and 2021, but there was yet another catalyst for TSLA’s meteoric rise—Elon Musk himself. During that two-year period, Elon became a larger than life figure.

He was hailed as a genius for turning Tesla and SpaceX into highly successful companies despite operating in extremely complex industries. Anything that Elon touched, seemingly turned into gold, so people wanted to invest in his companies.

Out of all of Elon’s companies, Tesla was the only one that was publicly traded, so naturally, it attracted a lot money from Elon fans. This created what you could call an “Elon premium” in the stock price, pushing it higher than where it would otherwise be without Elon at the helm.

The Unraveling

All three of these value components were at their peak when Tesla stock hit its all-time high in late 2021: the outlook for the underlying Tesla business was looking extremely bright; the Covid asset price bubble was raging; and the Elon Musk premium was at its highest level.

But since the stock peaked 13 months ago, one by one, these bullish factors have been unraveling. The first to break was the market environment. The Covid Bubble popped in spectacular fashion in 2022.

Companies from Meta to Amazon to Alphabet have all plunged as interest rates have soared and investors are no longer willing to pay the exorbitant prices that they once were for growth stocks.

But you’ll notice that up until October, even though Tesla was down, it was holding up much better than most other stocks. Something changed in that month.

I don’t think that it’s a coincidence that Elon announced that he was going to go through with his acquisition of Twitter in October, the same month that shares of Tesla began to perform so poorly.

With Elon’s full attention on Twitter, there’s been this growing perception that Tesla is being neglected.

But not only that, the view that Elon is an infallible genius has come under strain after people have witnessed the chaos at Twitter. He’s also lost some credibility for repeatedly selling Tesla stock after he told investors that he wouldn’t sell any more shares.

As the halo surrounding Elon has dimmed, the “Elon premium” embedded in his company’s stock price has deflated.

But that’s not the only thing that Elon’s antics at Twitter have impacted.

Since becoming CEO of Twitter, Elon has become a more polarizing, political figure. That’s caused some investors to worry that he may be hurting Tesla’s brand, particular among the liberals that have historically purchased the majority of Tesla’s cars. For instance, California—a left-leaning state— accounted for 39% of Tesla’s U.S. sales in 2021.

Typically, the politics of the CEO of a company doesn’t have that much impact on the demand for the company’s products. But as a brand that’s closely associated with Elon Musk, you could imagine that Tesla sales could be negatively impacted by everything he’s been saying and doing at Twitter.

In addition to these distractions, Tesla's business has also faced challenges due to slowing global demand for cars. Reports have indicated that Tesla's sales in China have declined due to economic weakness, and the U.S. car market has also seen some slowing recently.

All of these factors together are pushing Tesla’s stock lower.

The Outlook

Naturally, after such a steep and swift decline, investors are wondering when the stock will finally bottom out.

While that’s impossible to know, I think it’s fair to say is that the cyclical factors working against the company—like the slowdown in the U.S. and China auto markets—will eventually reverse. Those are short-term concerns, not long-term concerns.

Longer-term, what’s important is that Tesla is entering a new phase, where it’s going from being a pioneering EV company that succeeded against all odds to being the leading EV manufacturer with a target on its back.

The company is facing legitimate competition from other automakers for the first time. According to analysts at S&P, the number of EV models on the market will more than triple from 48 to 159 by 2025.

At the same time, the analysts believe that Tesla’s market share will fall from 65% to less than 20%.

A 20% market share of a fast-growing industry would still be great, but will it stop there or head significantly lower? That’s an important question that investors need to answer in order to figure out what the appropriate value for Tesla stock is.

There are other important questions as well, like:

• How profitable will Tesla ultimately be?

• Will Tesla’s brand be tarnished by Elon’s antics?

• Can Tesla maintain a strong presence in China despite growing tensions between that country and the U.S.?

• Do Tesla’s moonshot ventures, like autonomous vehicles and humanoid robots, have any chance at success?

• Will investors be willing to continue paying a premium multiple for Tesla stock?

Even after its decline, Tesla is still an expensive stock, with a market value double that of the next largest automaker, Toyota, despite making half the profits and producing a fifth of the number of cars.

A bet on Tesla is a bet that Tesla can maintain a very high market share in the electric vehicle market while maintaining a very high profit margin as well.  

We’ll see what happens.