Tesla shares closed down 8.6% Monday at $714.50 a share. That leaves them down almost $186 from the 52-week high of $900.40 they reached in January. That’s a drop of roughly 21%.
It seems odd to say, given that the term is usually applied to broad groups of stocks, but there is a new bear market—a drop of 20% from a high—in Tesla shares.
Of course, Tesla is the 800-pound gorilla in the EV sector. It is worth almost as much as all other traditional car makers combined. And when Tesla stock drops, other EV stocks follow because Wall Street often relies on Tesla’s valuation to come up with price targets.
Monday, shares of three other high-flying EV stocks with significant sales— NIO (NIO), XPeng (XPEV) and Li Auto (LI)—fell roughly 7% to 8%. And since Tesla stock hit its all-time high, NIO, XPeng and Li Auto shares are down roughly 20% on average, just like Tesla.
It looks as if Tesla is the benchmark for EV stocks just like the S&P 500 is the basis for comparison for U.S. stocks. That raises an interesting idea for EV investors: the Tesla version of beta. The beta concept can be thought of, in a sense, as a measure of a stock’s systemic risk. What happens to a market is linked to what happens to an individual stock by that stock’s beta.
If a stock, for instance, has a beta of 2, it would be expected to rise about 2% if the market rose 1%. Beta values aren’t always above 1. Gold-mining companies in the S&P 500, for instance, have a beta of roughly 0.5, so they don’t rise as fast if the broader index goes up.
Investors can interpret the gold beta as saying roughly half of what happens to those golds stock is explained by what happens to the S&P 500, and the other half is due to other factors, such as what’s going on with gold prices.
Beta is just a mathematical calculation. Investors, if they want, can calculate a stock’s beta relative to atmospheric pressure in Central Park. The math has to mean something, though, so no one does that. In the case of EVs, however, the idea of Tesla-as-risk to any EV stock doesn’t feel like a stretch.
The “Tesla beta” of the three Chinese EV stocks—NIO, XPeng and Li—is about 0.5. That can be interpreted, as with gold stocks, as saying about half of what happens to those three shares is a function of what happens to Tesla stock.
It’s an interesting idea. But what is happening to Tesla stock anyway?
It’s all about the potential for higher inflation. Increasing inflation, a growing concern in the market, tends to punish high-growth stocks more than low-growth stocks because of the way financial discount rates work. Most of Tesla’s cash flow comes in future years, and future cash flow is worth less today when interest rates rise.
Monday, many growth stocks took it on the chin. The Nasdaq Composite, known as the home of many fast-growing tech companies, fell 2.5%. Tesla’s beta value relative to the Nasdaq is about 2, so investors shouldn’t be surprised by a 5% drop in Tesla stock.
Tesla shares fell 9%, though. The extra 4% remains a mystery. The news site Electrek reported Tesla stopped taking orders for its lowest-priced Model Y, but high demand for lower-price EV models isn’t really a bad thing.
CEO Elon Musk is also spending a lot of time tweeting about cryptocurrencies. That might be unnerving Tesla investors. His tweeting, however, isn’t really any different than recent history. Musk is famous for his tweeting on lots of topics.
Write to Al Root at firstname.lastname@example.org