Why Tesla stock just crashed 7%


This article was originally published on All figures quoted in US dollars unless otherwise stated.

What happened

At long last, it’s official: Barring a shareholder revolt or a veto by regulators, Tesla (NASDAQ: TSLA) CEO Elon Musk will be buying Twitter (NYSE: TWTR) in a deal valued at $44 billion.

Investors in the electric-car superstar are apparently upset, and as of 10:12 a.m. ET on Tuesday, shares of Tesla were down 7%.

So what

Why the price drop? After all, as investment bank Wedbush sighed in relief today, Musk’s successful bid for Twitter should put an end to this “soap opera.” Wedbush doesn’t think there will be any regulatory objections, in which case Musk and Tesla should be able to get back to building electric cars and growing their profits. 

But Reuters this morning reminded Tesla investors of one potential “Chinese headache” that could arise from Musk’s Twitter deal. To wit, one quarter of Tesla’s sales come from China, and the company produces half of its cars at its Shanghai Gigafactory (with many of those cars currently being exported). China’s Global Times accentuated the point, noting how important the Chinese market is to Tesla’s growth ambitions, producing 53% sales growth in the first quarter.

If the same CEO who controls Tesla also comes to control Twitter, and someone on Twitter says something that the Chinese government doesn’t like, China might now be tempted to punish Tesla in order to gain leverage over what Musk allows (or doesn’t allow) to be said on Twitter.

Now what

That’s the headache that Reuters predicts, and it’s already producing pain for Tesla stock. But how worried should Tesla investors be about this possibility?

Perhaps not as worried as they are, I suspect. It’s not really a question of if China decides to pressure Tesla for views it disapproves of. It has already pressured the company many times before, generally to promote its own domestic automakers at Tesla’s expense.

Yet Musk and Tesla have navigated these obstacles with aplomb to date. After all, China might need Tesla as much as Tesla needs China, limiting the pressure it can bring. The $13.4 billion in revenue Tesla produced in the country last year generates tax revenue for the Chinese government. The Shanghai Gigafactory is also ramping up toward providing a total of 19,000 jobs.    

Plus, although Tesla’s revenue grew 53% in China last year, its revenue grew 80.5% worldwide. As time goes on, I think China is going to be less significant to Tesla’s growth trajectory, rather than more, and worries about China’s political power over Tesla will dwindle as well. 

This article was originally published on All figures quoted in US dollars unless otherwise stated.

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