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CEO Elon Musk has some simple advice for Tesla (TSLA 1.12%) employees sweating 2022’s 65% setback for the company’s stock price: Ignore it.
At first blush, the suggestion seems a bit insensitive — even teetering on being tone-deaf. Tesla shares make up a good bit of many employees’ compensation packages. These workers are seeing their net worth wither away rather quickly, and dramatically. Non-Tesla-employee investors are seeing the same.
In both cases, though, the best move at this point is standing pat. The stock’s selling off for temporary reasons. It should be humming again soon enough.
Musk’s official advice? In the postscript portion of a letter penned to Tesla’s employees last week, the organization’s chief executive says in reference to the stock’s slump:
Don’t be too bothered by stock market craziness. As we demonstrate continued excellent performance, the market will recognize that. Long term, I believe very much that Tesla will be the most valuable company on Earth!
It remains to be seen if Tesla will be — or even deserves to be — the most valuable company on Earth. But, he’s right about investors eventually recognizing the carmaker’s excellent performance. They just need to realize and/or remember three things for the stock to begin rallying again.
The challenge of being a high-profile CEO of a culturally relevant company is that the culture will speak to that CEO through the company’s stock.
In this case, the culture’s message is largely one of disapproval of Musk’s acquisition of social networking platform Twitter. Aside from being a potential distraction from his duties as head of Tesla, the crowd isn’t a fan of the negative attention Musk has brought himself at Twitter.
As the old saying goes, though, the damage has been done. Musk now owns Twitter, and has already proven he’s going to run it disruptively. He’s clearly not going to be discouraged by the market’s indirect revolt via the sell-off of Tesla shares; there’s nothing else to be said in the form of continued selling.
Indeed, if nothing else, this underlying dynamic may eventually fuel a recovery rally. Musk has confirmed he will step down as Twitter’s chief once a replacement is found. He’s not offering any sort of time frame, and odds are good he’ll find someone more like him than not (in terms of political, social, and cultural leanings).
Nevertheless, that clock is ticking. He’ll eventually be turning his time and attention back to Tesla.
While most of the western half of the world has shrugged off COVID-19-prompted lockdowns, that’s not quite the case in China. Beijing has continued to implement heavy-handed measures meant to curb the spread of the coronavirus. The end result is extreme difficulty securing much-needed components from Chinese suppliers. Lockdowns haven’t exactly helped production of — or demand for — Tesla EVs in China either, where the company does about one-fourth of its business.
Separately but simultaneously, most materials costs have soared over the course of the past year. The lithium used to make EV batteries costs roughly twice what it did just a year ago, and while well below its peak hit in March of last year, the aluminum used to make Tesla vehicles’ chassis is still relatively expensive too. That’s why Tesla’s cost of revenues grew measurably more than sales did in the second and third quarters.
On both fronts, though, the headwind is easing. China is easing a significant portion of its lockdown measures, and most materials prices, including aluminum and lithium, are falling — even if only shallowly. S&P Global‘s Market Intelligence says lithium carbonate prices peaked in 2022 and should hold steady at slightly lower prices through 2026, with supply finally catching up to demand.
Finally, there’s no denying more traditional carmakers like Ford and General Motors are making inroads within the electric vehicle market. A handful of newcomers like Nio and Rivian are making some noise as well. Tesla’s share of the U.S. and the global EV market have both fallen over the course of the past year.
It’s not the proverbial end of the world, however.
Largely lost in the discussion is that even though Tesla’s share of the electric vehicle market is shrinking, Tesla’s top line is still growing because the EV market itself is still growing — a lot. The International Energy Agency estimates EVs will account for a record-breaking 13% of the world’s light vehicle sales in 2022, up from 2021’s 9%. In a similar vein, Precedence Research is forecasting annualized EV market growth of 23% through 2030, jibing with outlooks from Beyond Market Insights and Deloitte.
Data source: Thomson Reuters. Chart by author.
Since Tesla is still a market leader, it’s still positioned to capture a huge piece of this growth.
While the argument for owning Tesla shares may be stronger than the stock’s recent performance suggests, don’t be blind to the lingering risks. The majority of investors may not be ready to embrace the realities laid out above. General market-wide weakness is still working against the stock as well, fair or not. There’s certainly no assurance Tesla shares will start to climb immediately just by turning the calendar from 2022 to 2023.
In a bigger-picture sense, though, Musk is right: It is stock market craziness doing the bulk of the damage to Tesla’s stock of late. Fortunately, this misguided bearish sentiment isn’t a permanent condition.
Translation: Long-term investors may want to use the recent rout as an entry opportunity, even knowing we may have not yet seen the exact bottom.
James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nio, S&P Global, and Tesla. The Motley Fool has a disclosure policy.
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