TESLA: Shareholders cut positions, September “Battery Day” and the capital asset pricing model


By: Larince Zhang

Yesterday, the share price of electric car giant TESLA plummeted by more than 20% to US$329.79, the biggest 1-day drop in history. Its market cap also shrank substantially by nearly US$82 billion to US$307.7 billion.

The “shrinking” of TESLA’s market capitalization may be due to the fact that the company’s stock was not included in the USA500 as expected. After all, TESLA has performed well recently and has achieved profitability for four consecutive quarters. The net profit calculated in accordance with the US General Accounting Principles (GAAP) is US$104 million, which basically meets the requirements for joining the USA500 Index. Therefore, it is disappointing that the company will not be included in the Index. As for the reasons for the “lost election,” a spokesperson for S&P Dow Jones Indices Co., Ltd. stated that “it is not possible to comment on individual companies and potential index changes.”

On the other hand, factors that are negative for TESLA’s stock price also include the largest institutional shareholder, the British fund company Baillie Gifford, cutting positions. According to the 13G statement submitted by Baillie Gifford to the US Securities and Exchange Commission (SEC) last week, as of August 31, 2020, its Tesla shareholding has been reduced from 7.67% in February to 4.25%. There were reduced holdings of 19.284 million shares, and the total set of cash was calculated at a total of 9.61 billion US dollars based on the closing price of US stocks of US$498.32 on the day. In fact, Baillie Gifford has been actively buying TESLA stocks since the beginning of 2013, and became the second-largest shareholder of TESLA in 2017 (holding 14 million shares).

The question now is whether the current stock price has bottomed out or if it is still possible that it will continue to fall? The things we need to pay attention to are:

  1. Car deliveries

TESLA vehicle deliveries will affect whether its future valuation and stock price match and make the stock more valuable. According to the Fortune analysis, TESLA needs to sell 3.5 million electric vehicles with an average price of US$58,000 by 2030. According to Bank of America’s price of US$700 per share, TESLA can build 24 new factories by issuing 10% of outstanding shares and raising US$70 billion to build 6 million new energy vehicles. Therefore, it would not be very difficult for TESLA to exceed $20.3 million in sales within 10 years.

2.” Technology Dream” of founder Musk

The Tesla brand is well-known for its “sense of technology” and “sense of high quality” and is also popular among investors. The continuous delivery of “technological dreams” to the public can be described as a key factor for Musk to keep (or even push up) TESLA’s stock price. On September 22, Musk may release information about Maxwell dry electrode technology, Roadrunner “million-mile” battery, and silicon nanowire battery products. According to Musk, the new battery material has a longer life and the energy density will be 50% higher than that of a normal battery (about 400 Wh/kg).

According to the Capital Asset Pricing Model (CAPM), we have analyzed the USA100, the US 3-month Treasury bond yield, and TESLA. From December 1, 2016, to June 30, 2020, the expected return rate of the USA100 was -1.58%, combined with a standard deviation upper limit of 3.31% and a lower limit of -6.47%; the expected return rate of the US 3-month Treasury bond yield was 1.49%. The upper bound of the combined standard deviation was 2.18% and the lower limit was 0.80%; the expected return rate of TESLA was -2.61%, the upper bound of the combined standard deviation was 12.39% and the lower limit was -15.00%.

It can be seen from this, is that risk-averse investors may prefer to invest funds in US 3-month Treasury bonds (in the best case, the yield can reach 2.18% and in the worst case, the yield can reach 0.80%; the standard deviation below 1 also shows low market volatility). For risk appetites, they may be inclined to invest funds in TESLA stocks. Under normal circumstances, the expected rate of return of TESLA from December 1, 2016, to June 30, 2020 (3 years and 6 months) would actually be negative. However, in the best case, its potential rate of return could reach 12.39%. Of course, in the worst case, its potential loss could reach -15%. Finally, compared with the 3-month Treasury bond yield (Rf), the market expected yield (Rm) recorded a decline of 3.07% and the TESLA expected yield fell by 4.04%.

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