It is generally advisable to refrain from using margin loans on any company when there is macroeconomic risk because the stock may move in a manner that is decoupled from the long-term potential of the company.
Tesla stock fell nearly 56% from its high of $402 earlier this year to close Friday at $179.05. An analyst at NewStreet Research named Pierre Ferragu tweeted about the cause and got Musk’s response. Pierre has been following Tesla’s performance for a long time and rarely misses a quarterly earnings call. For reference only, the following is a translation of Pierre’s tweet, which represents his own views.
The next ten tweets discuss the factors that have caused Tesla’s stock to decline this year, followed by a brief reflection on what may come next.
1. It has to be put in context. Two of them, #2 and #3, involve extensive modifications to long-term growth stocks.
2. The performance of three stocks this year is as follows: #1 blue, Tesla; #2 yellow, Amazon; and #3 blue, nVidia.
One of the Twitter-related concerns: Musk will sell more stock. Twitter will probably lose between $2 billion and $3 billion annually, but things might get better soon. Another $3 billion could be provided by Twitter. With regard to Tesla’s stock market value and trading volume, that is insignificant.
3. A second concern related to Twitter: branding. The Tesla brand is suffering from the news cycle at the moment. However, the impact on net favorability is minimal and most likely short-lived (see Uber in 2017), and it is unlikely to have an impact on die-hard fans, who make up the vast majority of market participants.
Has the ongoing Twitter controversy hurt Tesla’s reputation as a brand? The curve represents the annual change in the net favorability of the Tesla brand; Green line: Data source is YouGov; Orange line: Data source is Morning Consult. Net favorability: The percentage of respondents with favorable views minus the percentage with unfavorable views.
4. An additional Twitter-related issue: Musk’s diversion. This both drives and motivates Tesla. Are the staff members at Neuralink, OpenAI, SpaceX, and the Boring Company being diverted by Twitter? Tesla is running smoothly, and Elon is still in charge, albeit in a hands-off manner. That danger does not exist.
5. The first concern for demand: Tesla’s production is growing at an annualized rate of 50%. A partial inventory increase or minor production adjustments (20% Model Y production in Shanghai in December is only 2-3% of total quarterly production) can be expected and should not be interpreted as a negative signal for demand!
6. The second concern for demand: As consumers wait for subsidies in 2023, the US has struggled in the short term. Tesla is resolving the issue with a brief discount. The gross margins for the quarter might suffer a point as a result.
7. The third concern for demand: In order to increase demand and absorb capacity growth, Tesla is gradually lowering prices. It can do this without reducing gross margins because it has cost curve data. Fixed costs are absorbed by subsidies in the United States, localized production in Europe, and increased capacity at the two gigafactory plants.
8. Will Musk retire? The current Tesla is extremely developed and might adopt the SpaceX model. Looking at the chart below, we can see Elon quietly carrying out his duties as CEO while Tom Zhu manage all global operations and Elon continues to be the head of both technology and product. (Since 2018, Jerome Guillen has served in a comparable capacity as president of Tesla’s automotive division, reporting directly to Musk. Jerome was appointed President of Heavy Trucks in March 2021 and left his position three months later.)
9. Economic downturn: Delivery growth of next year may be 10-15 percentage points lower than today’s level of about 50%, and gross margin may be a few points lower than today’s level of about 30%, but it will crush current manufacturers and bring them dangerously close to insolvency. It’s a competitive accelerator for Tesla!
10. Consequence: I don’t make investment advice, I just offer industry opinion and facts.
Musk replied to Pierre: When there are macroeconomic risks, it is generally wise to avoid using margin loans on any company, as stocks may move in ways that are decoupled from their long-term potential.
