Tesla’s Week to Forget Is the Anchor Weighing On the S&P 500

(Bloomberg) – For all the swings in stock markets this week, one company’s performance stands out above the rest: Tesla Inc.

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Tesla stock is down 16% over the five sessions, marking its worst week since the Covid-hit market sell-off in March 2020. Meanwhile, the S&P 500 Index posted its best week in a month, closing 1.5% up on the due strong rallies on Monday and Tuesday. Tesla was by far the largest weight in the S&P this week, dropping about 13 points from the index.

The EV maker’s problems are no secret. It was struck by a double win of disappointing quarterly deliveries and Chief Executive Officer Elon Musk’s surprise decision to revive his bid to buy social media platform Twitter Inc. The Twitter deal raises the possibility that Musk will be forced to sell Tesla shares to fund the deal.

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For ardent Tesla fans like ARK Investment Management’s Cathie Wood, the sell-off presents a chance to buy more shares at the lowest price in months. The growth-stock guru, whose funds have been hit hard this year by rising inflation and interest rates, snapped up about $32 worth of shares on Monday. Mom-and-pop traders were also big buyers, with nearly $540 million in net purchases over the past five trading days, Vanda Research said.

On the other hand, there are more cautious investors who say the stock has several hurdles to overcome before it finds a clear landing strip. A looming recession, a growing competitive threat, a suspicious consumer pressured by high inflation, and the stock’s expensive valuation are the top concerns.

Musk’s focus

“Will Tesla stock keep a halo effect and thrive while other high growth, high valuation stocks suffer? That’s not the case this year,” said Catherine Faddis, Grace Capital’s chief investment officer.

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Musk’s purchase of Twitter adds a few more wrinkles. In addition to the uncertainty surrounding the deal’s funding, investors also worry that the billionaire may be pushing his limits with so many sophisticated ventures.

“Musk will have to ‘justify’ the valuation he paid for Twitter by generating value as quickly as possible, which will take his time and focus from Tesla leadership,” said Brian Mulberry, client portfolio manager at Zacks Investment Management . “Musk may be a business genius, but he’s still human and there are still only 24 hours in a day.” Zacks owns shares of Tesla through his all-cap Core fund.

Meanwhile, despite this sell-off, Tesla continues to outperform Big Tech and most of the S&P 500 with its stunning valuation. Tesla shares are trading at 51 times the company’s estimated forward earnings. For comparison, the S&P 500 trades an average of 16 times and Apple trades 23 times.

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That being said, there’s a reason Tesla has such a high valuation. It’s about the future. Tesla’s dominant position in the fledgling and fast-growing electric vehicle market makes it dangerous to bet against, especially in a global economy soon to be powered by green energy. And Musk, despite all the distractions, is committed to making the company a success.

“Tesla is currently unique among the big US tech companies because it has a much clearer fundamental growth trajectory than any other name. It also has the highest “keyman” risk of any stock in the S&P 500,” said Nicholas Colas, co-founder of DataTrek Research. “Musk’s attention to Tesla is valuable to many investors.”

(Updates stock and index movements in second paragraph.)

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