Tesla Falls Victim to the Collapse of the Silicon Valley Bank (SVB) As Wolfe Research Downgrades the Stock on Credit Availability Implications

When a company is as big as Tesla, its financial health is a function of not only idiosyncratic factors but also macroeconomic ones. In light of the dramatic collapse of the Silicon Valley Bank (SVB) last week and the ensuing fears of a full-blown banking contagion, Tesla shares have received a rare downgrade on credit availability implications.

As we detailed in a dedicated post earlier today, the crisis began on Thursday when SVB announced that it would book a $1.8 billion after-tax loss on a fire sale of investments intended to boost liquidity. SVB also announced that it would try to raise $2.25 billion via equity offerings. However, the bank failed to raise the required capital, prompting the regulators to shut it down on Friday.

As with almost all things in the financial world, the buck stops at the door of the US Federal Reserve, whose monetary tightening regime has exposed tier-2 banks in the US, such as SVB and the First Republic Bank, to accelerated outflows of deposits as clients tap US Treasuries and money market funds in search of higher yields. This adverse macroeconomic environment was made worse by the SVB’s choice to retain a large number of high-duration debt securities on its balance sheet without adequate hedging. Since such securities suffer a greater reduction in value in a rising interest rate environment, SVB was forced to absorb an ever-increasing amount of unrealized losses as the fair value of such securities continued to decline relative to their book value. When faced with accelerating deposit outflow, SVB had no choice but to try to raise additional capital. Having failed to do so, the regulators were compelled to step in and shut down the bank, creating chaos for not just direct SVB customers but also companies such as Tesla.

In its investment note today, Wolfe Research has downgraded Tesla shares to a “Hold” recommendation. The research house believes that the contagion from the collapse of SVB will take time to resolve, creating a headwind of limited credit availability. With California accounting for one-third of the EV sales in the US, and 41 percent of Tesla’s US sales, the region is of critical importance to the EV giant’s overall financial health. In the aftermath of SVB’s collapse, Wolfe Research believes that tech spending will slow down and that there will be larger layoffs.

As for Tesla’s idiosyncratic factors, Wolfe Research continues to take a positive view of Tesla’s ongoing cost reduction efforts, with the US EV tax credits providing a critical tailwind for the company’s demand outlook.

In recent weeks, Tesla has slashed the prices of its Model 3 and Model Y EVs by around 20 percent in the US and elsewhere. Just last week, the company also reduced the base price of its Model S by 5.3 percent and that of Model X by 9.1 percent in the US. Following material price cuts, the Plaid versions of both models are now priced at $109,990. These aggressive price cuts have revived the delivery cadence of the company but at the cost of profitability.

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