Tesla, Inc. (NASDAQ:TSLA) is just embarking on the most exciting journey in recent automotive history. The firm, which skyrocketed to become one of the world’s most talked about since the 2012 release of the Model S, is starting to deliver the Model 3, its mid market electric sedan. Despite that, however, some on Wall Street are getting nervous about its future.
Reuters reported on Friday morning that two key funds are selling off their Tesla stock. According to the report both Fidelity Investments and T. Rowe Price both started selling their shares in the firm in the most previous quarter. Both funds have kept millions and millions worth of Tesla stock on their books despite the substantial stock sell off.
The change in holdings could be simple re-balancing of portfolios, or it could be based on changing assessments. In recent months more and more of Wall Street has become neutral on the Tesla Model 3 launch because of the risk reward balance on the cards.
Big hedge funds sell Tesla stock
The report, which is based on mandatory quarterly reporting, show the two hedge funds taking profits after the massive rise in value in the shares over the last few months. From the start of the year shares have risen by more than 65 percent through the market close on Thursday.
Fidelity funds sold about 43 percent of their total holdings of Tesla stock. That amounts to a total of 1.62 million shares sold in the three months through June.
T. Rowe Price Group sold about 48 percent of its total Tesla stock. That’s a total of 1.33 million shares. Despite the sale of shares in the quarter, both T. Rowe Price Group and Fidelity are both still in the top ten holders of Tesla stock. Both still hold more than one million shares in the firm.
Overall, according to Reuters, institutional investors appear to be selling out of Tesla shares. The T. Rowe Price and Fidelity sell offs account for about 3 million fewer shares by themselves. On top of that, about 10 million more shares were sold by institutional investors in the June quarter.
Big funds tend to balance their portfolios based on the total value of their holdings as a percentage of assets rather than the total number of shares. In terms of building a portfolio, shares are about as irrelevant as the number of grains of flour in a cup (Though you don’t have to report flour grains to the SEC quarterly.)
Therefore a massive rise in the value of a firm can result in big shareholders like Fidelity and T. Rowe Price selling its stock. That doesn’t mean there’s anything wrong with the firm, however.
There’s still a lot of Tesla buyers
These hedge funds may have taken some profits on their Tesla, Inc. (NASDAQ:TSLA) holdings, but that doesn’t mean there’s no support for shares. The firm is trading well above the median price target that Wall Street has set for it. That means that investors as a whole seem to think that Wall Street is being too conservative about the firm’s future.
This goes, too, for the firm’s debt. After announcing that it was planning on selling about $1.5 billion in bonds, the firm found more buyers than it had debt to sell. It ended up getting rid of $1.8 billion in bonds. The interest rate, at 5.3 percent, was far lower than would ordinarily be expected from a firm with such a low credit rating.
The bottom line is that investors love Tesla, in general, far more than traditional models from Wall Street suggest they should. This goes not only for small investors, but apparently also for big institutional investors. They might be selling off now after the big rise in the value of the firm, but that doesn’t mean they’re abandoning it.
As outlined above these firms tend to care about total value rather than number of shares. The sell off is likely nothing to worry about for the time being, though it is important to take a look at what may have driven the move.
Tesla Model 3 offered big risk, unknown reward
The Tesla Model 3 has turned Elon Musk’s firm into the single most valuable car maker in the United States. For a small company that makes very few cars, that’s a very big ask worked into its market capitalization. Investors assume that visionary Elon Musk is right when he says he can sell a mass market car at 25 percent gross margin. If he fails to deliver on that promise, the chances of Tesla stock living up to its current value seem slim.
At the same time, this is the first opportunity for mass production at the firm’s Fremont factory. We know that Elon Musk and his team have had all sorts of production problems and delays in the past, so it’s difficult to predict we’ll see smooth sailing for the next couple of years.
The possibility of a disastrous delay, one which both stalls the Tesla Model 3 and costs the firm a whole lot of money, should be the biggest risk on investor minds. Such an issue may not even emerge from its Fremont factory. An earthquake in South East Asia or any other external factor could be enough to stall the car for months.
On top of that Elon Musk is taking a very hard line with his own workers. There is a unionization effort taking place in the firm’s Fremont manufactory, and the CEO is taking a rather conspiratorial line to challenge it. Rather than admitting to the very real concerns of workers, he has claimed that the efforts are essential an underhanded trick lead by the Detroit auto firms.
If the company gets beyond all of the immediate risks, we just can’t know how big the reward will be. Some analysts are hoping that Tesla will develop various technology that will keep it ahead of the pack. To some extent tech development works something like a lottery, however. So it’s hard to bet everything on the idea that Tesla, Inc. will be the one to develop the self driving car.
Wall Street is getting Neutral on Tesla Stock
Because of the limits of their models, a lot of analysts on Wall Street are getting a little bit more conservative in their Tesla stock outlook. Most of them aren’t putting together models based on the idea that Tesla, Inc. (NASDAQ:TSLA) is a great disruptor. Instead they’re trying to base valuation on the potential of the Tesla Model 3 being what Elon Musk has promised.
Tesla Inc. (NASDAQ:TSLA) has a huge amount of support in ordinary investors, but it looks like the big backers are planning on holding off for the time being. That could change as soon as some new catalyst arrives, however.
A catalyst could arrive in the form of news of the Tesla Model 3 passing production milestones, or else a product announcement. Tesla is apparently planning to unveil a new electric truck this September. We’ll have to wait and see what Wall Street thinks of that announcement before we see what effect it could have on the stock price.