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From fairytale to nightmare

Matein Khalid

Tesla (TSLA) was a fairytale in 2020 when it soared 740% and then 50% in 2021. The fairytale has morphed into a nightmare in 2022, with the shares down 52% from their January highs of 402 to 168 as I write. What went wrong?

One, 2022 has been an annus horribilis for NASDAQ, which is down 32% YTD. Since Tesla has a stock market beta of 1.50, investors should not be surprised if it is down 50% as this is its historical correlation and volatility relative to the index. This drop has been a disaster for Elon Musk as it has cost his net worth to vaporize by $200 billion. Unquestionably the mother of all financial pain points for the South African cyborg who will one day teleport the human race to outer space.

Two, high interest rates/inflation increase the borrowing costs of buying a luxury car for consumers at the same time as their disposable incomes plummet in real terms. So all EV shares have gotten slammed and Tesla is no exception. The EV business will get a lot more competitive as auto colossi like General Motors, Volkswagen and Toyota ramp up their EV offerings. It is not exactly coincidental that GM, VW and Toyota shares have all greatly outperformed TSLA in the past six months, a scenario that would have been heresy back in the Stone Age circa 2020.

Three, mathematics of discounted future cash flows hits all growth stocks with high valuation metrics when the Fed turns ugly and interest rates spike higher. TSLA trades at 34 times forward earnings, so I would not be surprised to see it trade down to 120. The problem with growth stocks is that their market cap can be slashed by 50% as has happened to TSLA, yet they find no support from value funds as they are still considered way too expensive. TSLA was the quintessential growth stock in 2019 to 2021 and now must pay the price for this.

Four, EV demand in China has obviously plummeted due to the property meltdown, collapse in economic growth, draconian covid lockdowns and epic falls on the Shanghai/Shenzhen stock exchange, especially for Chinese tech stocks. This is the reason NIO is down 70% in 2022 and TSLA has not been unscathed by the drop in Chinese demand and logistics/supply chain disruptions in the Shanghai giga factory.

Five, Musk has grossly overpaid for Twitter and had to sell $19 billion in Tesla stocks, not exactly a vote of confidence for TSLA. Notice that he has hardly tweeted at all on TSLA (SEC?), removing another source of hype and froth.

Six, TSLA charts scream sell to me as it has lost its momentum and violated critical support levels. This puppy was once a Doberman Pinscher but is now just another NASDAQ dog headed south.

Seven, I just do not see any major product launches that will move the needle and thus TSLA on the horizon and reverse its current bearish channel. My strategy now is to wait until the shares decline in the mid-140s and then begin to design option strategies where my worst case scenario is to take delivery of TSLA at 120 to 125.

Also published on Medium.

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