Not too long ago, Tesla (NASDAQ:TSLA) stock was outperforming other growth stocks. Amid the crash of the speculative, disruptive names, software stocks, and SPACs, it seemed like Tesla was a safe haven. Until recently, TSLA stock was still trading near the $1,000 per share mark and was up year-over-year even as other tech names were starting to plunge.
However, Tesla’s shares have since gotten caught up in the whirlwind. Its shares have fallen by double-digit-percentage levels in recent weeks and briefly skidded below the $750 mark following the Russian invasion of Ukraine.
Much of Tesla’s recent decline can be blamed on the market’s recent skid. However, company-specific news has contributed to the stock’s slide as well. Specifically, it appears that the selling of TSLA stock by a member of the Musk family last fall may end up coming back to bite the company. Here are the relevant details.
An Insider Trading Scandal
As you may recall, last fall Elon Musk launched a poll on Twitter. On Nov. 6, he asked his followers if he should sell 10% of his TSLA stock. He suggested that the move would make sense in light of the controversy about billionaires avoiding capital gains tax, since selling the stock would result in him having to pay a large amount of tax to the U.S. Treasury.
Of the 3.5 million Twitter users who voted on the question, 58% agreed that Musk should sell the shares, and he did unload 10% of his stake. During the exact week that Musk was tweeting about selling his stock, Tesla’s shares reached their all-time high of $1,243. The stock moved sharply lower immediately after Musk’s transaction.
The episode was all a bit unorthodox. Asking Twitter users whether to sell billions of dollars of a public company’s equity was unusual. However, Musk’s actions may well have all been legal as long as he disclosed them properly.
But the actions of Elon Musk’s brother, Kimbal, are murkier. Kimbal, it turns out, decided to sell $108 million of TSLA stock precisely one day before Elon published his tweet about selling his shares and the stock started to decline. The SEC, it appears, seems to think that Kimbal’s sale may have been illegal because of the knowledge he had about his brother’s forthcoming actions.
Other Concerns
Another big worry for Tesla right now involves its self-driving software. Regulators forced Tesla to recall nearly 54,000 vehicles earlier this month because the company’s self-driving software at times has not halted Teslas completely at stop signs.
That was the latest setback for Tesla’s vaunted self-driving program, which has always been full of promise but has thus far not quite lived up to the initial expectations of its cheerleaders. The self-driving system has often had a problem with so-called “phantom braking,” which occurs when a vehicle stops suddenly for a perceived hazard that doesn’t actually exist.
While Tesla was one of the first to deploy autonomous driving software, one wonders if its competitors such as Alphabet’s (NASDAQ:GOOGL) Waymo, are actually far ahead of Tesla in that area.
A third issue for TSLA stock now is that it is a momentum name that lacks momentum. Prominent fund managers such as Cathie Wood of Ark Invest shot to superstardom thanks to their investments in Tesla many years ago. As TSLA stock soared, so did Wood’s ARK Innovation ETF (NYSEARCA:ARKK).
Over the past year, however, the winds have shifted. ARK Innovation has now lost more than half of its value since its peak. We’re starting to see major outflows from momentum-style funds as investors rotate into other sectors and employ other strategies. Further, as many investors take their money out of Ark Innovation and other, similar funds, a self-perpetuating downward slide by the funds’ top holdings , including TSLA stock, could occur.
The Verdict on TSLA Stock
The good news for those who are bullish on Tesla is that bad news doesn’t seem to affect the shares’ performance over the long term. For example, Elon Musk previously had problems with the SEC because he tweeted about a buyout that failed to materialize, but that didn’t stop Tesla’s climb over the long term.
So it’s easy to believe that the latest bad news won’t affect the stock over the long term either. I personally wouldn’t want to own the stock of a company that’s being investigated by the SEC. TSLA stock is also in a difficult position technically, as selling pressure from Ark Innovation and other momentum funds could cause Tesla’s shares to head into a tailspin.
But, in light of the stock’s past performance, Tesla, until proven otherwise, may well be worth buying on weakness now, even though its fundamentals look poor.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a sizable New York City-based hedge fund. You can reach him on Twitter at @irbezek.
