It isn’t looking good for TSLA shareholders right now. TSLA stock is down 48% YTD and you’d have lost half your money if you invested in Tesla stock during the August 2022 mini-market rally.
Why is Tesla Stock Dropping?
Tesla stock has been down a lot recently for several reasons including:
- Elon Musk sold over 7 million Tesla shares in August to fund his Twitter purchase
- Higher short interest as short sellers bet against Tesla Stock after Elon’s sale
- Decreasing demand for Tesla vehicles as evidenced by the Q3 2022 production and delivery report
- TSLA’s high P/E ratio is beginning to fall down to the S&P mean average
- Rising interest rates are hurting EV stocks across the board and Tesla is not immune to this downturn
Elon Musk Dumped Tesla Stock in August
It all got started in August when Elon Musk sold 7.92 million shares of TSLA stock to fund his purchase of Twitter. Many investors follow Elon Musk’s trades closely and it wasn’t a good sign for him to dump his TSLA stock.
Elon Musk sold his shares between August 5th and 9th when TSLA shares were trading near $300. Tesla shares are down 33% since Musk dumped his shares and could continue falling even further due to several other headwinds.
Short Sellers Bet Against Tesla Stock After Elon’s Sale
Once short sellers realized that Elon Musk sold TSLA stock, they began betting against the stock by short TSLA. The number of Tesla shares sold short increased 3x since August 15th as the short began crashing the stock.
Short sellers borrow shares then sell them on the market to push the price down. All of this selling pressure causes TSLA shares to fall until the shorts buy back their shares to cover. As the market continues its bearish crash, Tesla stock could dip below $200 or lower until the shorts start covering.
Decreased Q3 2022 Demand for Tesla Vehicles is a Bad Sign
To make matters even worse, Tesla’s Q3 2022 vehicle delivery and production report showed a massive drop in demand for electric vehicles.
Tesla produced over 20,000 more EVs than it delivered, which is a warning sign of falling demand when compared to Tesla’s Q2 2022 report. Investors are worried that competition is catching up with Tesla as companies like Lucid Motors, Rivian, and Ford start producing more electric vehicles.
Tesla stock soared due to a lack of competition from other companies but times are changing fast.
Tesla’s P/E Ratio is Falling Fast
It’s crazy to think that Tesla stock used to trade at a P/E ratio of over 500 while the mean S&P 500 P/E ratio is around 16. Tesla’s 73 P/E ratio makes the stock look grossly overvalued and that’s one of the reasons why Tesla shares are falling so much.
The 2022 stock market crash is getting ugly and investors are pulling money out of stocks in favor of safer assets such as bonds and other high-yield assets. Tesla stock doesn’t pay a dividend so there is no reason to hold it for passive income.
Rising Interest Rates are Bad for Stocks
As I mentioned earlier, the Fed crashed the stock market this year due to several interest rate hikes. The consensus is that the Fed will raise interest rates 2 more times this year by 75 basis points in November and December to control rising inflation.
The September 2022 CPI inflation data showed that core inflation is continuing to rise so the Fed will probably stick to its plan and continue raising rates. This isn’t a good time for stocks and don’t expect a stock market rally until the Fed reverses its course and lowers interest rates again.
It’s a tough time for Tesla shareholders who have watched TSLA stock drop from its all-time high. The good news is that Tesla is a diversified energy company with plenty of long term growth ahead.
I’m bullish on Tesla stock over the next 5 years because the company should grow its revenue & earnings despite some short term challenges. Don’t panic just yet because things will get better in 2023. I’m looking to pick up Tesla stock under $200.