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Jul 24, 2020

Tesla sinks as euphoria shifts to scrutiny on growth, valuation

Tesla options imply a 15% price move in either direction post earnings: Market strategist


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Investor euphoria around Tesla Inc. shares succumbed to gravity Friday, with one of the biggest catalysts behind automaker’s recent rally now done and dusted.

Tesla shares dropped as much as 9.7 per cent to US$1,366.54 in New York, its lowest intraday price since July 8. The stock has lost 14 per cent since the company delivered stronger-than-expected earnings on Wednesday.

Shares of the company had risen 280 per cent this year through Wednesday, reflecting the possibility of a fourth consecutive quarterly profit, an inclusion into the S&P 500 Index, entry into new markets and pending announcement of better battery technology. The biggest driver out of them all was the second-quarter profit, since it would open the door to the S&P 500.

Actual inclusion into the index, however, is not considered imminent. An S&P Dow Jones Indices spokesman has said the index isn’t reconstituted on a pre-determined timeline, and that companies that meet the eligibility requirements are not automatically added. In any case, analysts believe the stock’s lofty valuation already reflects the potential for an inclusion.

With two big catalysts for the stock’s meteoric rise having passed, many expect the valuation to take a hit.

“We struggle with Tesla’s valuation, which essentially appears to discount world domination, and we suspect the stock will be particularly vulnerable to any market-wide factor rotation back to value or hiccup relative to expectations,” Sanford C. Bernstein analyst Toni Sacconaghi wrote to clients on July 23.