Tesla: The big reset. Big tech employees face grim reaper. And bonds are back…unless central bankers are right.
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The market value of Tesla is down more than 60% today from the $1.2 trillion peak it reached in 2021. But Tesla isn’t the only electric vehicle player having a tough time. Peers like Lucid, Rivian and Nikola are all down by similar amounts or more. Consumers around the world are struggling to cope with high inflation and as a result they are delaying buying big ticket items like cars.
In response to falling demand, Tesla has been cutting prices aggressively. The prices of some models have been cut by up to 20%. Tesla says it’s simply passing lower supply chain costs on to customers but slowing deliveries suggest they are also looking to boost demand and protect market share.
Slowing demand for its products has not been the only factor impacting the Tesla share price. The CEO, Elon Musk, has been embroiled in the chaotic acquisition of Twitter. One could argue this has not helped the Tesla brand. Shareholders have questioned if his Twitter antics have distracted him from his duties leading Tesla. As if that’s not enough, Elon is currently in court, defending himself against Tesla shareholders claiming they lost money as a direct result of his tweeting.
The SEC and Elon Musk have a somewhat chequered history. After the SEC investigated the ‘funding secured’ tweet, Elon and Tesla settled the matter by both agreeing to pay the SEC $20mn. The $40mn total was earmarked to be distributed to investors who suffered as a result. The SEC forced Elon to step down as chairman but allowed him to stay on as CEO.
Now, there’s another potential headache on the horizon. Mid-December last year Elon Musk sold more than $3bn of his Tesla shares. A few weeks later the company reported car deliveries below market expectations and the guidance they had previously given. The negative surprise sent the shares hurtling down by 12%, the worst daily drop since September 2020.
There are some exceptions but generally speaking corporate insiders are prohibited from trading their own company shares while they are in possession of material inside information. So the sale of shares by Musk has raised some questions amongst experts. James Cox, a professor who specialises in securities law posed two questions in the Wall Street Journal: was this trade exempt from insider trading rules and if not, did Elon Musk know Tesla was going to miss their delivery targets? So far Elon Musk, Tesla and the SEC have all declined to comment on the matter. This is something to keep a close eye on.
Tesla has a differentiated product, leading edge technology and few of the drags, like pension and other legacy costs, of traditional automakers. But their recent expansion into the higher volume segment of the auto market carries increased execution and competitive risks.
Despite signs of a slowdown, Tesla is still growing deliveries at a rapid clip. Deliveries in 2022 totalled 1.31mn, up 40% from 2021. The company target was to grow deliveries by 50% and the miss took the market by surprise.
Current valuations, around 30 times 2023 earnings, are significantly cheaper than the 200 times earnings it was trading at late in 2021. Given a more difficult global economic environment it seems unlikely that growth will accelerate in 2023 but if Tesla matches the 2022 growth rate, the 2024 price-to-earnings ratio is closer to 20 times.
The pandemic brought a boom in demand for tech and online services. Hybrid working required new solutions for workers to stay productive. To deliver, tech companies needed more workers. A lot of them. But evidence is mounting that the pandemic glory days for tech demand are over.
To prepare for an economic downturn, companies are tightening their digital spending belts. As a result there have been a wave of layoffs in the tech sector with more than 200,000 tech workers being laid off over the last year.
On Friday, Google joined the ranks of companies announcing layoffs. They plan to cut around 12,000 jobs or 6% of their workforce, their biggest round of layoffs ever. This is in-line with announcements from peers like Meta, Amazon and Microsoft. The announcement that Google is taking steps to reign in costs and focusing its efforts on AI was taken well by the market. Shares rose more than 5% on Friday.
The layoffs we’ve seen in the tech sector is a normal part of the business cycle. Tech companies have been wrong footed by the decline in demand for digital services and they are adjusting to a new reality.
While the numbers seem large, many tech companies have been on a hiring binge over the last few years and are laying off only a small portion of the new employees they hired. To put it in perspective, Google is laying off less than the number of new employees added in the last quarter we have data for, Q3 2022.
Of the large tech companies announcing layoffs, Apple is conspicuously missing from the list. Unlike some of their peers, they have not materially increased their hiring during the pandemic. As a result, they are potentially less likely to lay off employees.
Rationalisation of the workforce and refocusing efforts where it can add the most value is positive for the tech sector. Given the sharp decline in tech sector valuations it’s reasonable to expect announcements of any steps to cut costs over the coming quarters to be taken as a positive development by the market. We haven’t seen the last of the layoffs yet. Bloomberg recently reported that Spotify might be the next tech company announcing layoffs, potentially as soon as this week.
To all the affected tech workers out there job hunting - we hope you all find a good home soon!
There is an increasing divergence between what central bankers say they are going to do in 2023 and what market participants are expecting. Someone is going to be wrong.
Central bankers in Europe and the US are doing their best to convince investors they’re not cutting interest rates in 2023. They’re not succeeding. None of the policymakers at either the ECB or the Fed expect an interest rate cut in 2023. They are mostly in agreement on the expected path of interest rates. A few more rate hikes in the first half of 2023, followed by a period of rates remaining at a high level.
Christine Lagarde, president of the ECB, said her mantra in 2023 is to ‘stay the course’. Jerome Powell, chairman of the Federal Reserve, recently pointed out that history warns against prematurely cutting interest rates in an inflationary environment. They are desperately trying to manage market expectations.
Rising expectations that inflation has peaked are behind the recent rally in bonds. The Bloomberg Global Aggregate Index is up more than 3% so far this month. If it ends the month at this level it will be the strongest January performance for investment grade bonds in more than 30 years. A widely followed Bank of America survey of fund managers in December revealed they favour bonds over other asset classes for the first time since 2009. So far they have been proven right but it’s early days.
The combination of slowing economic growth, an increasingly uncertain outlook for corporate profits and receding inflation could mean 2023 is a much better year for bonds. This is the consensus view from professional fund managers according to the most recent Bank of America survey.
Consensus views in investing carry risks. The recent rally in bonds suggests the market doesn't believe central bankers. This comes as no big surprise. Central bankers don’t have the best record predicting inflation or interest rates. In fact, Federal Reserve Chair Jerome Powell even warned that the Fed “dot plot”, their forecast for future interest rates, should be taken “with a big, big grain of salt.” 
A key risk this year is that traders and fund managers expecting rate cuts are wrong. If inflation proves stubborn and central bankers keep policy rates higher for longer, bond performance could be volatile. Whatever 2023 holds we believe central banks will prevail in their fight against inflation. When rates eventually start falling again bonds will perform much better than they have over the last couple of years.
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