Why is Tesla losing value and what does it mean?

9 Mar 2021

Image: © Grigory Bruev/Stock.adobe.com

The electric car maker founded by Elon Musk lost a third of its value for the third time in a year. Here’s what you need to know.

If you’ve seen headlines about Tesla in the last year, you’ve probably seen some extreme numbers on both ends of the scale.

In July 2020, the electric car maker’s capitalisation was more than $320bn. Around the same time, the company reported that it brought in $6bn in revenue and a profit of $0.50 per share in the second quarter of 2020.

At the end of December, the company joined the S&P 500 Index and, although it suffered a drop of more than 6pc that day, the company’s share price hit a record high of $900 in January 2021.

But now, Tesla stock is now down by a third from its January high, making it the third time in about a year that the company’s shares have fallen dramatically.

What’s going on?

Tesla’s stock is one of the more volatile on the market, and large drops can be seen after the large surges that precede them.

In a single week in February 2020, the company’s stock rose by 50pc before falling by 23pc. After soaring again in August later that year, it dropped in September.

The most recent drop in value could be attributed to the company’s decision to purchase bitcoin. Reuters reports that since the company announced it bought $1.5bn worth of bitcoin in February, its stock has steadily fallen while the price of bitcoin has climbed.

The bitcoin investment has added a level of uncertainty to Tesla’s stock. Couple that with the fact that the company often straddles the two descriptors of automobile company and battery or tech company, and the waters become even muddier when it comes to evaluating its true value or what it may earn in the future.

Wedbush analyst Dan Ives said in a note to clients that while Tesla is dominating the electric vehicle market, weaving bitcoin into the mix has “added volatility and noise driving the emotional debate around its name”.

What does it mean?

In simple terms, Tesla stock fell so sharply because it had such a height to fall from in the first place. And, despite the dramatic drop, the company is still valued at about $575bn.

While investors and analysts struggle to assess Tesla’s true worth, the company’s jumpy stock is likely to keep bouncing. Sharp rises are likely to happen again, followed by sudden drops, with the highs often coming after new development announcements.

Last weekend, the company’s founder, Elon Musk, said Tesla is expanding its full self-driving beta, with plans to double its size with a new software update and increase the number of participants tenfold. According to Bloomberg, Tesla is also building a giant 100-MW battery to plug into Texas’ power grid.

These types of developments could see the stock rise again and it is unlikely that the most recent drop in value is of any great concern to Musk.

And, as Alex Wilhelm pointed out in TechCrunch in January, the company may continue to enjoy the benefits of being a favoured brand among investors.

“It seems that today’s market is willing to value stocks not on their past performance, current performance or analyst-expected future performance, but on the rosiest future that investors have imagined for their favourite companies,” he wrote.

Jenny Darmody is the editor of Silicon Republic