13 July 2020 - The day Tesla dropped $55b from its market cap intra day trading
It was a wild Monday. The trading day opened quite well with all the tech stocks generating positive returns. Tesla was up nearly 16% at one stage, when it was valued at $330bn market cap, which is more than Toyota, Ford, General Motors and Fiat Chrysler combined. At this peak, Tesla would have been the 10th largest company in the S&P500. It is widely debated whether Tesla will be included in the S&P500. This has possibly made the stock bit volatile recently.
At the close of the trading day, Tesla was worth only $275bn. It dropped $55bn in a few hours of trading. Just this drop in market cap is worth more than General Motors and Fiat Chrysler combined. The swing from +16% at one stage during the day to -1% by close was the largest swing for a single stock since June 30, 2010 according to Dow Jones Market Data, which was (ironically) one day after Tesla went public.
Overall, it was a frustrating trading day as all the gains from the first hours of trading got wiped out by the close. Is this pointing to a downward trajectory for the rest of July?
For Tesla specifically, quarterly results are due on July 22. It is believed that the company could post a fourth consecutive quarter of profits and may be considered for inclusion in the S&P 500. Lot of Tesla’s recent stock price growth is not driven by the company’s strong fundamentals, instead the front runners are buying up the stock forcing the S&P index to give the stock a higher and higher weighting, thus forcing the ETFs / Index funds to pay up and buy even more shares. Once the price has been pushed up to sufficient levels, the front runners will potentially exit, leaving the index funds holding the stock.
On July 22, we will find out if Tesla is now eligible for consideration to be included in the S&P 500 index. There are a certain set of minimum criteria that stocks have to meet in order for a company to be added to S&P 500. If Tesla posts a loss for the current quarter (which some analysts are expecting), then it won't pass the minimum criteria for inclusion and this could potentially see a downward trend in the stock price.
So, it feels like the phenomenal run That Tesla’s stock has had this year is nearing an end. Some analysts are already recommending a underweight rating on the stock with a target price of $740, which is 52% below last week’s closing price for the stock. Even the most bullish analysts had a price target of $1,500.
Summary - if you own a Tesla stock, keep a close eye on its quarterly announcements on July 22nd. If you are sitting on a reasonable profit, maybe it is time to close the trade and rake in the profits as there is material risk that the stock may crash soon!
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