Oppenheimer downgrades Tesla stock, calls sentiment 'severely damaged' on Musk drama

·Senior Reporter

Updated Mon, Dec 19, 2022, 8:39 AM3 min read

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While investors are on edge awaiting the latest from Tesla (TSLA) CEO Elon Musk’s plans for Twitter, one Wall Street firm has had enough.

Oppenheimer analyst Colin Rusch downgraded Tesla stock to Perform from Outperform in a note to clients published Monday morning, saying challenges regarding Twitter have left sentiment towards Tesla shares "severely damaged."

Since Musk took ownership of Twitter in late October, Tesla shares are down about 30%.

"The combination of Twitter's unclear cash needs and diminishing options for Mr. Musk to serve those needs amid the broad public backlash driven by inconsistent standards application for Twitter users, notably banning select journalists, is pushing us to the sidelines on TSLA," Rusch wrote in a note to clients. "We believe increasing negative sentiment on Twitter could linger long term, limiting its financial performance and become an ongoing overhang on TSLA."

Rusch's downgrade comes after an eventful weekend for Musk's leadership at Twitter, which resulted in a surprise poll from the billionaire on Sunday, which asked users whether he should step down as head of the social media company.

Musk said he would abide by the results, which did show a majority support Musk leaving the top spot.

Should I step down as head of Twitter? I will abide by the results of this poll.
— Elon Musk (@elonmusk) December 18, 2022

Rusch added: “We see potential for a negative feedback loop from departures of Twitter advertisers and users due to inconsistent standards resulting in increased financing needs that may lead to incremental TSLA sales just as Tesla's competitive environment intensifies."

Those increased financing needs may have led Musk to sell 22 million shares of Tesla stock last week, worth around $3.6 billion. The overhang from those share sales sent Tesla shares tumbling 16% last week.

Reports over the weekend also said Musk is seeking additional equity investors for Twitter. Tesla shares were down more than 2% early Monday.

Rusch, however, believes it's not just the threat of large stock sales weighing on the stock, it's Elon Musk’s continued polarizing presence at Twitter that is damaging the Tesla brand.

“While we have understood Twitter’s potential cash needs as a risk for TSLA shares, we believe banning journalists without consistent defensible standards or clear communication in an environment where many people believe free speech is at risk is too much for a majority of consumers to continue supporting Mr. Musk/TSLA, particularly people ideologically aligned with climate change mitigation,” Rusch wrote.

Rusch is not bearish on Tesla from a pure technology and expertise point of view, however. The firm believes Tesla is still driving down costs for EV manufacturing in the long term, and other manufacturers will struggle to match its efficiency.

Moreover, Rusch sees this split between Musk's public drama related to Twitter and Tesla's actual business creating plenty of opportunity for investors.

"We expect TSLA to present myriad trading opportunities long and short," Rusch wrote. "We believe sentiment is severely damaged and that any positive fundamental news near term will likely lead to select short covering followed by subsequent re-shorting."