Tesla’s (NASDAQ: TSLA) plunged 21.1% yesterday, and the company’s share price dropped to $330.21 before market close.
Heavy Losses in a Bear Market
As a result, the company suffered its biggest losses since going public. Tesla’s stock plunge effectively wiped off $82 billion from the automaker’s market capitalization.
Tesla’s stock lost 33.7% of its value since closing at a record $498.32 on August 31. This was the day Tesla’s 5-for-1 stock split took effect.
The previous record selloff was the 19.3% drop on January, 13 2012. Tesla’s biggest post-COVID-19 decline was 18.6% on March 16.
What are the reasons behind that sudden drop in Tesla’s stock price?
Several reasons can be attributed to Tesla’s drop of its stock price.
The stock’s selloff started the previous week. On September 1, Tesla announced that it intends to raise $5 billion in share offerings at market pricing. The final settlement of the offering is expected to be completed today on Wednesday. The stock offering helped trigger a selloff of Tesla’s shares.
Secondly, the Scotland-based investment management firm Baillie Gifford announced its intentions to reduce its stake in Tesla. The former is Tesla’s second-largest shareholder with 6.3% of the shares outstanding. Baillie Gifford now owns 4.25% of the company’s stock.
According to the Wall Street Journal, Baillie and Gifford reduced its Tesla stake for one reason. The company has argued that there are guidelines that restrict the percentage of the portfolio that can be in a single stock.
Thirdly, Tesla’s stock price drop can be largely attributed to the company’s surprise exclusion from the S&P 500 index.
The S&P Dow Jones Indices announced last Friday that three companies will be added to the S&P 500: Catalent Inc., Etsy Inc. and Teradyne Inc.
Prior to its Q2 results, the company already posted 3 consecutive quarterly earnings. $143 million on September 30, 2019, $015 million on December 3, 2019, and $16 million on March 31, 2020.
There are no clear reasons as to why Tesla was snubbed. Wall Street analysts themselves were puzzled by the decision. Tech analyst Dan Ives believed that it “is a head scratcher and the stock will likely be down for the indexing implications.”
Baird analyst Ben Kallo stated that Tesla fulfilled all the inclusion criteria. Kallo stated that it is “unclear why Tesla was not included in the recent balancing cycle.” The analyst, however, believes that Tesla will “eventually be added to the S&P 500.”
In light of Tesla’s recent stock market price fluctuation, is it all doom and gloom for the company? The simple answer is NO.
Tesla’s S&P 500 snub is only a temporary, albeit a surprising setback. After years of publishing net income losses, the company is now consistently posting profits.
Tesla sold a total of 90,650 vehicles throughout the second quarter of 2020, beating market estimates. These numbers come at the height of the COVID-19 pandemic.
The company is also bound to increase its production output around the world, and by extension, its vehicle deliveries for clients.
Tesla’s Shanghai facility began production earlier this year and production output at the plant is expected to scale up to 4,000 vehicles.
The company is also constructing two new Gigafactories: One in Austin, Texas and another in Berlin, Germany. This means that production output is expected to scale up worldwide at a rapid pace. As a result, Tesla will be able to generate more profits through the diversification of its supply chain.
Additionally, since Tesla announced a $5 billion share offering, the volume of shares outstanding increased.
This is known as share dilution. This means that the stock price was bound to go down in the first place.
So what happened is a natural panic stemming from the fluctuation of the stock market. Panicky investors sell their shares to maintain their gains.
All in all, Tesla is here to stay, and its stock price will bounce back at some point in the future.