A friend asked me this morning why TSLA is down so much compared to the rest of the market (ie., just 2 days ago TSLA was at $355 in afterhours and today it hit $295).
The answer is somewhat complicated so I thought I would write my thoughts and just tell my friend to read this post.
First, TSLA is a volatile stock with one of the largest short interests on the market. And it has one of the largest short interests in the market because it’s a controversial company. Some people think TSLA is going to the moon, and others think it’s overvalued and headed to bankruptcy. Sure, there are people in the middle but for the most part people buying and selling TSLA have extreme views of the company.
Because there’s such a large short interest, this exacerbates market moves in times of uncertainty. In other words, there is more volume of stock available (since shares are taken out short as well) and this increases the ups and downs of the stock.
Second, on a fundamental basis much of TSLA’s value is based on what Tesla will accomplish in the future. Thus, any change of predicted plans can make a big difference on how people perceive TSLA’s value today.
Third, TSLA (like other highly volatile stocks) tends to go as high as it can until it hits a road block and then goes as low as it can until it can hit a road block. It’s similar to a huge fire that keeps going in one direction until it can’t any more, and then goes the other direction.
On top of this, people are able to take on margin to buy and sell TSLA stock. So, when the stock price drops suddenly then people who bought TSLA on margin often get margin calls, and they are forced to sell the stock, thus causing the stock to drop more. Sometimes this happens until the price is low enough where it’s very attractive to large buyers who come in to scoop up bargains.
Another reason for the dramatic moves in TSLA stock is high-frequency trading (algo trading) and traders jumping on trends in stock prices. When a stock drops, there’s tremendous force, not just from people selling the stock, but also from computerized trading and other traders that jumps on board automatically to profit in the trend. But, this also works in the other direction as well. When TSLA rises dramatically it can be exacerbated from traders (both computerized and humans) who jump on board.
In terms of yesterday’s and today’s drop (from $345 to $295, a drop of $50) it appears that investors were somewhat disappointed with TSLA’s Q4 2017 earnings reported on Wednesday. While Elon Musk affirmed Tesla’s goals of reaching 2500 Model 3 cars/week by end of Q1 and 5000 Model 3 cars/week by end of Q2, in the conference call Elon sounded like those goals were stretch goals and not likely to be reached. For one, Tesla needs to ship equipment from Germany which arrives in March to boost their production to 2000-2500 Model 3 cars/week, but it appears it might take longer than that to get to 2500 Model 3 cars/week. Some analysts, like Adam Jonas of Morgan Stanley, is predicting that Tesla won’t reach 5000 Model 3 cars/week in 2018. Update: Tesla claims automated lines from Germany not required to reach 2,500 week Model 3 production goal in Q1 2018
In some ways, I think the volatility in TSLA stock isn’t helpful to Tesla or to individual investors. Many individual investors get freaked out by a sudden 15-20% drop, or overly enthused when the stock jumps up suddenly 15-20%. It’s an emotional roller-coaster for many.
Personally, I look at the daily stock price as an emotional tug-of-war between emotional investors on both sides of the market. While the short-term price is determined by many factors beyond Tesla’s control, the long-term trajectory and ultimate price of the stock will be determined by Tesla’s long-term execution and performance over time.