What happened to Tesla?
Tesla shares have been rising at an unprecedented rate over the past 52 months. The company has a 52-week low of $43.67 and a high from Aug. 31 of $502.49. Tesla’s stock is a potential test case of the effect of democratizing access to markets through applications such as Robinhood. In July, nearly 40,000 trades were registered on Robinhood for Tesla stock in a four-hour period. On Aug. 31, when Tesla split its stock, the Robinhood systems crashed as demand from individual traders skyrocketed.
The effect of these non-institutional investors on the stock market is yet to be determined. Tesla is one of the first beneficiaries of the new access that novice investors have to markets. Many professionals believe that these investors are overvaluing stocks and will cause an eventual collapse in the companies they support or potentially in the market as a whole.
One of the primary reasons that individual investors have noted for supporting Tesla since May 2020 has been its assumed inclusion in the S&P 500 in September 2020. The S&P 500 index is often purchased by passive investors wanting their individual portfolio to mimic the growth of the U.S. economy as a whole. Historically, an investment in the S&P 500 would provide annualized returns of 9.8%. This risk/reward ratio is far different from that of regular Tesla investors, often seen as high-risk takers. As such, joining the S&P 500 would have introduced the stock to an entirely new market and driven up its demand substantially.
Likely anticipating this increasing demand and wanting to make its stock more accessible to individuals, Tesla announced in early August a share split that would take place on the last day of the month. The combination of hype around the stock split, S&P 500, and upcoming Battery Day announcements led to the stock’s all-time high on Aug. 31. The stock dropped slightly later that week but, as Labor Day weekend approached, it remained above its one-week low.
Early in the weekend, as the news of its exclusion from the S&P 500 broke, the company also announced that it would be liquidating $5b of its own stock to increase its cash reserves. As the markets reopened on Monday, not only were Tesla’s investors coming to terms with the rejection from the S&P 500 and the dumping of stock by the company itself, but two major competitors – Nikola and Lucid – made major announcements.
Nikola announced a partnership with General Motors. Previously, Nikola had focused its efforts on electric vehicles for long-haul drives. Its deal with GM would see the companies work together to manufacture a pickup truck for release in 2022. Lucid simultaneously began leaking information about the Lucid Air, a new Model S competitor that many analysts believe has the potential to threaten Tesla’s dominance in the electric car industry.
This unique situation – where a company dumped its own stock, which was being propped up by individual investors after being rejected by a major index, and facing the first real competition to its near-monopoly in a fast-growing market – is what led to one of the biggest drops for an individual stock in the history of Wall Street.