The electric-vehicle company, Tesla, is experiencing a slight recovery in its stock price after a steep decline on Thursday. The stock plummeted 12%, closing below $183, following the company's disappointing earnings call and lack of 2024 volume guidance.
On Friday, Tesla stock initially opened with a 1.6% increase and reached almost $187 before receding to $183.93, resulting in a 0.7% gain. In comparison, the S&P 500 rose by 0.1%, while the Nasdaq Composite remained flat during midday trading.
Shareholders are anticipating a significant bounce in the stock price after Thursday's sharp decline, but it may still take some time. According to Gary Black, co-founder of the Future Fund Active ETF, which holds Tesla, the "three-day rule has to run." This informal rule signifies the duration that portfolio managers typically require to regroup and reevaluate their investment decisions after a significant setback.
Tesla stock has been challenging for portfolio managers this year, with its shares underperforming the Nasdaq by nearly 30 percentage points year-to-date. This poses a significant problem for managers who are judged based on their relative performance to a benchmark. If they had a higher allocation to Tesla stock than the benchmark index at the beginning of the year, they are already at a disadvantage of 1 or 2 percentage points. As a result, they are likely to exercise caution before making further investments.
Gary Black expects Tesla stock to remain weak for a couple of days due to this dynamic. The rule of three, rather than factors such as price target updates from Wall Street analysts or vehicle recalls, is likely to have a more substantial impact on the stock's performance.
Tesla Stock Faces Target Cuts as Growth Slows Down
Tesla, the renowned electric vehicle manufacturer, recently faced a price target cut on its stock from several analysts. Jairam Nathan, an analyst at Daiwa, lowered the price target to $245 per share from $280 per share. Despite the reduction, he maintained a Buy rating. Nathan expressed concerns about a potential growth slowdown extending until 2025, with a new Tesla vehicle anticipated for release by the end of next year.
Nathan also revised his 2025 earnings estimate down to $4.25 per share from $5.50 per share. Meanwhile, Wall Street's estimate currently stands at $4.49 per share according to FactSet. Consequently, Tesla's projected 2025 earnings translate to approximately 41 times the estimated earnings.
Similar to Nathan, Ryan Brinkman, an analyst at J.P. Morgan, also adjusted his 2025 estimates and price target. Brinkman's target dropped from $135 per share to $130 per share, while his 2025 earnings estimate decreased from $4.50 per share to $4.25 per share. He maintained his Sell rating on Tesla shares.
Additionally, the company recently initiated a recall of approximately 200,000 vehicles due to issues with the backup camera. Fortunately, this problem was successfully resolved through a software update.
It's worth noting that recalls typically have minimal impact on stock prices for automotive manufacturers. Unless recalls result in substantial costs or involve serious accidents, they are often inconsequential. In fact, even in cases that appear significant, recalls usually do not significantly affect stock prices. For instance, the recent recalls of Chevy Bolt batteries in 2020/2021 for potential battery fires were covered by a General Motors supplier.
In 2023, the ten largest vehicle sellers in the U.S., including Tesla, recalled a total of 32 million cars. Of this figure, Tesla accounted for 2.6 million recalled units. Interestingly, more than 99% of Tesla's recalls have been resolved through over-the-air software updates.
Despite the challenges, some investors remain optimistic about Tesla's future. Cathie Wood, from ARK Invest, recently seized the opportunity and purchased around 178,000 shares of Tesla stock across two funds on Thursday.