Nov 23, 2022 - Economy

Tesla stock analysts resist harsh market reality

Data: FactSet; Chart: Axios Visuals

Analysts have been slow to slash their target prices on Tesla — despite a price drop that's destroyed more than half a trillion dollars in paper gains over the last year.

The big picture: The fact that analysts still think Tesla should be worth $290 a share — 70% above the current market price of $170 — reflects the difficulty the market is having in adjusting to the new reality of higher interest rates.

  • (H/t to Bloomberg, which spotlighted the growing gap between analysts and the market on Tesla.)

Between the lines: As we've written (again and again and again) high-interest rates are kryptonite for share prices of tech-driven companies. This is especially true for companies that make relatively little money now but expect vast profits in the future when their products inevitably change the world.

  • Tesla is the textbook example of just such a company.

Catch up quick: After the Fed cut interest rates to almost zero during the COVID crisis in March 2020, the stock exploded upward.

  • It rose a seemingly absurd 1300% between late March 2020 and early November 2021, when the Fed signaled it would start raising rates to combat inflation.
  • Since then, Tesla has collapsed by nearly 60%, vaporizing more than $700 billion in market value.

Yes, but: Tesla is not alone here. Other highly valued technology shares have gotten crushed by the change in interest rates, most notably Meta.

Tesla's tumble also reflects the fact that Elon Musk ended up buying and running Twitter on a whim, forcing him to sell billions of dollars worth of shares to help pay for the purchase.

  • And Meta's share doldrums are partially driven by CEO and founder Mark Zuckerberg's pet virtual reality environment, which has cost the company billions (and the red ink will likely grow "significantly." )
  • The two companies' year-to-date stock losses — 50% and 70%, respectively — are far worse than the Nasdaq composite's 30% drop this year.

The bottom line: Given the incredible run that Tesla had at times over the last couple of years, it's understandable why analysts are slow to recognize the new reality. But when they do, it could set off a new bout of selling.

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