The most hated and shorted stock, Tesla finally caved in yesterday ending the day down a record 21.6%, its biggest decline ever beating the 19.3% drop on Jan. 13, 2012, the previous record decline. Tesla lost as much as 27% during the intraday trading on Tuesday.
Tesla stock has lost one-third of its value in just over one week, few days after it hit a record high of $498.32 on the day its five-for-one stock split took effect. This drop pushes the stock into its second bear market this year. The previous selloff this year was the post-COVID-19 crisis decline, a drop of about 18.6% on March 16. Tesla went public on June 29, 2010, at a pre-split adjusted initial public offering price of $17 ($3.40 split adjusted).
A huge part of the reason for this drop is the failure of the stock to make it into the S&P 500 index in the recent rebalancing cycle which saw the addition of Etsy, an online marketplace for crafters; Teradyne (TER), a company specializing in industrial automation and robotics; and Catalent (CTLT), which develops pharmaceuticals.
Tesla’s addition to the index was highly anticipated as the company had checked off the market capitalization and 4-quarter profitability requirements. This anticipation in fact was the reason for the huge rally in Tesla’s stock price in recent months. The addition to the index would have forced big market participants whose portfolio mirror the movement of the entire S&P 500 index to include Tesla in their portfolio, creating more demand for the stock.
The absence of Tesla was a big disappointment for investors, prompting the sell-off. The reason it wasn’t added, even after meeting major requirements, is still a wonder to Wall Street. However, the reasonable consensus has to do with the quality of Tesla’s profitability. Tesla managed to be profitable in the last 12 months only due to the sale of regulatory credits to other carmakers, rather than from selling cars.
Howard Silverblatt, a senior analyst at S&P Dow Jones Indices, said “the group behind the index has no requirement to add companies, even when, like Tesla, their high market value makes them a factor in overall stock market moves. Instead, it sought to match the index to underlying sectors of the economy, rather than track market sentiment”.
Another contributor to Tesla’s landslide was the announcement last Tuesday where the electric vehicle maker disclosed that a large shareholder reduced its stake. It also disclosed a $5 billion stock offering. On Friday, the stock had plunged as much as 8.6% intraday, before pulling a sharp U-turn to close up 2.8%, to snap a 3-day losing streak. Fortunately the company confirmed it had finished the stock offering before the Tuesday drop happened.
The final trigger for Tesla’s big drop came the same day that General Motors took an 11% stake in Nikola, an Arizona-based battery and hydrogen fuel cell vehicle developer. The agreement will require GM to supply manufacturing and other services to Nikola. This sent shares of the upstart company up more than 40%
Tech stocks overall have been battered during this period, as the tech-heavy Nasdaq is down about 10% since its own record high close on 2 September.
An Independent Economics Researcher