May 20, 2022 - 10:19am

Even before yesterday’s embarrassing revelations about Elon Musk, Tesla was having bad year. Its stock price has fallen nearly 41% since 2021 and it is showing no sign of slowing down. For reference, Ford — America’s largest car manufacturer — has seen its stock price rise by around 6% in the same period. Clearly, the problem is not the car market. So, what is going on?

Tesla has followed a similar trajectory to another Silicon Valley start-up: Uber. The taxi company has seen a decline in its stock price of almost 55% in the last year, even though Medallion Financial, a company that provides loans to purchase taxi medallions in the US, is only down around 19%. This shows that, like Tesla, the issue is the company, not the market.

These companies have a lot in common: both are experimental business models and neither one has proven itself to the market. Uber has been around for 13 years and has never turned a consistent profit, while Tesla has been around for 14; any profit the company makes is completely reliant on carbon credits — and occasionally on Bitcoin trading.

Uber, meanwhile, has serious problems with its business model. Hubert Horan, an analyst of the taxi industry, argues that “the widespread belief that it is a highly innovative and successful company has no basis in economic reality”. While I would not go quite that far in describing Tesla, I have laid out problems with its business model on this site before.

The two companies’ stock prices are falling in line with the broader tech stock market crash. Technology is where most of the entrepreneurship — and therefore risk — has been in the market this cycle. Markets basically think of companies like Uber and Tesla as tech companies and price them accordingly.

But Tesla has even deeper problems. This week, it was announced that Tesla would be dropped from the top ten ESG rated companies in the S&P500. This is problematic for Tesla because it markets itself as a green investment and, as mentioned, relies on carbon credits for its survival. The outrage over Tesla having its ESG rating downgraded has itself provoked a lot of backlash and, in the medium-term, may have investors questioning exactly what these criteria are based on. Ultimately though, given the general market turmoil and Tesla’s until-now impeccable green credentials, in the immediate-term the pain will be felt by the company.

This raises another issue for Tesla: its founder’s decision to enter the political arena. Since Elon Musk announced that he was going to buy and reform Twitter — another company with dubious business prospects — he has been making increasingly political statements on his own Twitter account.

If Musk becomes more vocal about his support for the Republican Party, this could alienate a Democrat-dominated Wall Street — lobbying from the financial sector has vastly favoured Democrats over Republicans in recent years. That said, Musk has tended to be ahead of the pack in many regards — a trend-setter, not a trend-follower — and it is an open secret that many in the professional classes are disappointed with the Biden administration, both in terms of the direction it has taken and in terms of actual outcomes.

Given the car company’s already shaky business model, it is hard to see how the Twitter deal will help Musk’s or Tesla’s interests. One thing’s for sure: Tesla’s golden moment is over. Whether Elon Musk’s is remains to be seen.

Philip Pilkington is a macroeconomist and investment professional, and the author of The Reformation in Economics