Why Tesla Stock Dropped 4.8% on Monday?

What happened

Mr Musk asked Twitter users on Saturday whether he should sell 10% of his Tesla stock to pay taxes. Mr Musk, a billionaire, began the question by saying that “a lot of recent unrealized gains have been made as a means of tax avoidance.”

Why did Tesla shares fall?

After Mr Musk’s tweets indicated that he may soon sell a tenth of his stake, which recently cost $210 billion, there are some reasons why shares could be expected to fall.

He is the CEO of the company. Stock sales by so-called insiders such as top executives and board members are often viewed as negative by investors, as they believe that insiders know more about a company’s prospects than the publicly known ones. Is.

Then there is the sheer size of potential sales. A one-time sale of $21 billion of Tesla stock would roughly equal the value of the shares that would someday change hands on the market; The stock price can be expected to decline as a result of that imbalance between supply and demand, all else being equal.

Finally, a potential sale would be unusual for Mr. Musk, who has been known to borrow against the value of his Tesla holdings, but has generally not sold shares.

Why would he sell the shares now?

He said no. In 2012, Mr. Musk was awarded the option to buy more than 20 million Tesla shares as part of his compensation package. Those options are vested and will expire in August 2022. If he plans to exercise these options, he will have to pay tax on any gain from the sale price.

Mr. Musk does not take a salary or bonus as Tesla’s CEO, and has said the only way for him to pay taxes is to sell the stock.

When can the sale take place?

Neither Mr. Musk nor Tesla have said when the stock sale will take place.

How can Mr. Musk sell a stock?

He hasn’t clarified that, but he will have several options. Take, for example, what’s known as a 10b5-1 plan, which enables corporate insiders to buy and sell shares at predetermined times according to insider-trading rules. Alternatively, he could have hired bankers and sold all the shares at once in a process known as block trade. Given the huge demand for Tesla shares in recent months, it is possible that it may also sell shares through an online trading account, although it appears that this may take some time.

Is Mr. Musk obliged to sell the shares?

No.

Is there any indication that the poll may be turning upside down on Mr. Musk?

not so far. Tesla has been one of the best performing large capitalization stocks during the pandemic. One risk of selling large stocks is that this momentum could hurt sentiment among traders, who buy stocks because they are moving in the hope of further gains.

But shares eased their decline on Monday after opening more than 5% from Friday’s closing, indicating that some fans are buying the dip, or buying the stock because it’s cheaper.

Tesla shares have soared more than 50% last month since the pandemic began in March 2020, putting them above $1 trillion, making it one of the best-performing securities for individual investors. Shows enthusiasm.

Tesla’s power as a speed favorite is evident in that rally, which seems to have been catalyzed by the announcement by rental car company Hertz Global Holdings Inc. that it was making a major purchase of Tesla vehicles.

That said, Tesla has long been a target of short-sellers, who place bets by borrowing and selling shares, hoping to profit by later repurchasing shares at lower prices. Many argue that the gap between the company’s enthusiastic following and its economics has only widened during the pandemic-era rally. While the company has recently become consistently profitable on a quarterly basis, its shares are trading at extremely high valuations.

The price-to-earnings ratio for Tesla shares, compared to earnings for the past 12 months, stood at 376.5 as of Monday. This compares to 37.6 for Microsoft Inc., the largest company by market capitalization, and 23.9 for the S&P 500 at Friday’s close.

Tesla is the world’s largest auto company by market value, even though its sales account for a small portion of the global market. Its market value is more than $1.2 trillion, which is more than the combined value of Daimler AG, Ford Motor Co., General Motors Co., Toyota Motor Co. and Volkswagen AG.