The incredible six-day, 60 per cent rally in Tesla Inc. that left Wall Street watchers scratching their heads screeched to a halt Wednesday.
The electric-vehicle maker fell as much as 21 per cent to US$704.11 in New York, erasing most of the gains the stock saw over the past two days amid what seemed like an unstoppable advance. Tesla had added 36 per cent to its value in the first two days of the week, but by Wednesday afternoon, it was just 7.7 per cent higher than where it opened Monday morning, and 12 per cent above Friday’s close.
The breather comes as analysts at Canaccord Genuity cut their rating on the stock to hold following an “electrifying run” on concerns that its Shanghai factory may struggle as China works to contain the coronavirus.
Tesla shares have “had a Bitcoin-like move and profits are being taken off the table with technical levels being hit,” Wedbush analyst Daniel Ives said. The analyst expects the stock to settle in the US$700 range and start moving higher again on the potential of its China business, despite coronavirus fears.
The rapid run in Tesla shares over the past three months, which accelerated to a dizzying pace over the past week, came on the back of two strong quarterly reports, the quick construction of its China factory, an ahead-of-schedule launch of the new Model Y crossover vehicle and a first profit for the battery plant the company jointly operates in Nevada with Panasonic Corp. Some also pointed to the significant amount of short interest in Tesla and said at least part of the rally was explained by investors exiting bearish positions.
“Look, everybody has a pain threshold,” Steve Eisman, senior portfolio manager at Neuberger Berman Group, told Bloomberg Television’s Tom Keene Wednesday. “When a stock becomes unmoored from valuation because it has certain dynamic growth aspects to it, and has cult-like aspects to it, you have to just walk away.” The investor who bet against subprime mortgages before the 2008 fibioreportscial crisis said he has covered the short in Tesla he disclosed in 2018.
A sense of caution and some confusion prevailed in the market.
“Many investors are struggling to identify a strong fundamental underpinning for the move,” Morgan Stanley analyst Adam Jonas wrote in a note to clients, adding that investor feedback from the discussions has been “calm, curious and overall cautious.”
That sentiment may have finally caught up with the stock, starting with the jaw-dropping US$109 drop in the price right before the closing bell on Tuesday. The stock closed at US$887.06, bringing its 2020 gains to 112 per cent. Wednesday’s selloff would pare that back to an year-to-date gain of 73 per cent.
Wall Street is pedalling back on some of its enthusiasm, with Canaccord Genuity’s Jonathan Dorsheimer downgrading Tesla to hold from buy, warning of a likely “reset of expectations” in the first quarter and flagging China’s coronavirus as a clear headwind to the Shanghai facility.
Meanwhile, Chief Executive Officer Elon Musk, who added US$17.6 billion to his own fortunes on the back of the rally since the beginning of the year, teased the possibility of a new factory in Texas by asking his Twitter followers to vote on the idea.
Wednesday’s turn lower does offer some comfort to short sellers, who got off to a rough start for the year, amassing US$11.47 billion in mark-to-market losses, including US$5.63 billion just in early February, according S3 Partners’ Ihor Dusaniwsky. That compares with the US$2.82 billion in mark-to-market losses that bearish investors racked up for all of 2019.
“The stock has gone up too much too fast, and we should expect it to bounce through a period of volatility,” Roth Capital Partners analyst Craig Irwin said. “I think this is people blowing the froth off the top.
–With assistance from Ed Ludlow, Janet Freund and Francine Lacqua.