It isn’t pretty when investors lose faith in a story stock.
After years as a market darling, Tesla’s share price had tumbled by nearly 40% this year and 22% in the last month as of Monday’s close. At least two prominent, formerly-bullish analysts have soured on the stock this week, and prices on its benchmark bond due in 2025 are flirting with record lows.
Red Light Tesla Inc. share priceSource: FactSetAs of May 21,2019
More alarming than the selloff itself is the absence of a clear catalyst. It was just this month that Tesla was able to raise a net $2.4 billion by selling shares and convertible debt. That should have softened the blow of dismal first-quarter results. In the past, fresh infusions of capital have tended to push Tesla stock higher.
A change in that pattern portends bigger issues than disappointing the investors who just showed faith in the company. After all, the infusion didn’t eliminate Tesla’s medium-term need for external funding. Those funds are earmarked for bondholders, banks, suppliers and the significant capital spending its business requires this year.
As a cash-burning operation, Tesla will continue to depend on the generosity of the capital markets to pay bills and attract talent via stock options. The easier it is to tap the market, the more ambitious it can be in setting its goals. Amid talk of a “spartan diet” by Chief Executive Officer Elon Musk, its horizons are now shrinking. Tesla has laid off employees, closed stores and cut prices this year.
Even after the recent tumble, there is a lot more sizzle than steak to Tesla’s story. Its shares still sell for more than 30 times next year’s earnings estimate of $6.47 a share, according to FactSet. Toyota and General Motors fetch about 10 and 6 times, respectively—assuming, of course, that consensus earnings estimates hold firm. Analysts had penciled in more than $11 a share in 2020 at the start of this year.
Ludicrous speed was fun while it lasted.