Tesla (NASDAQ:TSLA) is one of the world’s largest electric vehicle manufacturers and also has some smaller tech operations. Founded by Martin Eberhard and Marc Tarpenning in 2003 and bought by Elon Musk in 2004 (Musk technically bought a “founder” title as part of his deal to fund the then-startup), the company nearly went bankrupt by 2018 before it finally managed to achieve profitability, and as a result of that positive development, the rising popularity of EVs globally and the Covid-driven stock market bubble, its share price skyrocketed by over 1,000% between March 2020 and November 2021.
However, since that point, Tesla’s stock price has gradually declined and is now down 61% from its all-time high. In fact, it’s now trading at a 52-week low. Personally, I think the market is overreacting, because investors are selling off the stock despite solid financial results being reported. Catherine Wood (Trades, Portfolio) of Ark Invest seems to think the same, as she recently scooped up more Tesla shares. However, around the same time, Musk was selling shares. Normally an insider selling shares isn’t too big of a deal, but the huge amounts of stock that Musk is dumping are highly unusual and raise a red flag. Who should investors follow – Wood or Musk?
Musk sells Tesla
A recent SEC Form 4 filing shows Musk sold nearly 22 million Tesla shares with an estimated value of $3.6 billion. Musk made the trades between Monday Dec. 12 and Wednesday Dec. 14. These stock sales were made at an average share price between $153 per share and $176 per share.
This disposal of Tesla stock was a shock to many Tesla investors who haven’t been paying attention to the news. Musk’s total year-to-date sales of Tesla stock have reached $23 billion; you can see more of Musk’s and other insiders’ trading history on the stock on Tesla’s GuruFocus insider trades page.
For those who have been paying attention to the news, though, the reason for the sale is crystal clear: Musk’s $44 billion purchase of Twitter, a cash-burning company, is literally burning a hole in his pocket. Musk put $20 billion of his own money forward to buy Twitter, but since most of his wealth has always been wrapped up in Tesla stock, he had to take on debt for the rest. In a recent Tweet he wrote, Beware of debt in turbulent macroeconomic conditions, especially when the Fed keeps raising rates,” showing that the debt is weighing on his mind.
Regardless of what you think of Musk’s efforts to transform Twitter, there’s no denying that he’s not doing it in a profitable manner. In addition, while he’s off spending the vast majority of his time on Twitter, who’s running Tesla? Indeed, according to a report from Reuters, some Tesla insiders are claiming that Musk was looking for a new CEO to head the EV company in recent months and may have even identified a potential successor. Musk himself also said that he “does not want to be the CEO of any company,” so it’s possible that he may even step down from Twitter as well.
Wood buys Tesla
On Dec. 14, Wood’s Ark Invest purchased 74,862 shares of Tesla at an average price of $156.80 per share, according to Ark’s daily trading data. These shares were split between Ark Invests various active ETFs. Its flagship Ark Innovation ETF (ARKK) bought 61,537 shares, its Ark Robotics ETF (ARKQ) bought 10,066 shares and its Next Generation Internet ETF (ARKW) bought 3,259 shares.
The Ark Innovation ETF historically counted Tesla as its largest position, making up 10% of its fund in 2020, and thus the company benefited from the huge amount of growth in the stock. At the time of writing, Tesla stock makes up a 7% stake and is the third largest holding in the fund with a market value of just over half a billion following recent share price declines.
Tesla has continued to produce strong financial results despite tough economic conditions. In the third quarter of 2022, the company reported $21.45 billion in revenue, which increased by a rapid 56% year over year. Deliveries increased by a rapid 42% year over year to 343,830 vehicles.
Production ramped up, with production of the Model Y having surpassed 3,000 builds per week at its Giga Texas facility. In the third quarter, overall production increased by 54% year over year to 365,923 vehicles.
In terms of profitability, Tesla increased its operating margin by 262 basis points to 17.2%, which is fantastic given the average margin for the automotive industry is around 9%. Tesla has been criticized in the past for being overvalued for an automaker, but its margins back up the company’s claim that it should be valued as more of a technology company. Earnings per share was $0.95, which increased by an outstanding 98% year over year and beat analyst estimates by $0.06.
Tesla has also continually kept innovating its business, from creating the world’s largest metal press, the gigapress, to its self-driving vehicle development efforts. Its self-driving technology continues to get better, and its full self-driving beta technology is being rolled out with more drivers signing up. Self-driving vehicles could disrupt a range of industries from ridesharing to the railway industry.
At its AI day, Tesla also revealed its humanoid robot prototype Optimus, which could also bring huge revenue in the future as this technology is adopted in homes and manufacturing facilities.
Tesla has a solid balance sheet with $21.1 billion in cash and short-term investments compared to just $1.4 billion in long-term debt.
Tesla has historically been known as an overvalued stock, but it now looks to be steadily growing into that valuation. The stock is trading at a price-sales ratio of 5.98, which is 25% cheaper than its five-year average. This is at a similar valuation to early 2020.
The GF Value chart indicates a fair value of $398 per share based on historical valuations, capital gains and analysts’ estimates of future business performance, making the stock significantly undervalued at the time of writing.
I believe Tesla is a fantastic company, and it continues to generate strong financial results despite economic uncertainty. Given the Twitter fiasco, I think it’s most likely that Musk is selling Tesla to help fund Twitter, although this is just speculation as Musk himself has not confirmed his reasons. Wood has been buying the dip, which is another encouraging sign. I think Tesla investors would like to see Musk focusing more on Tesla, though. There could be “key man risk” at play for the stock if Musk keeps neglecting Tesla or even steps down as the Tesla CEO.
This article first appeared on GuruFocus.