Tesla Slides As Top Holder Reduces Stake; Merrill Lynch Sees 23% Upside

Shares of Tesla dropped another 2.3% in Wednesday’s extended market session after investors continued a sell-off as one of the electric carmaker’s top shareholders divested part of its holding.

Tesla (TSLA) declined to $437.26 in late-market trading after the stock closed 5.8% lower on Wednesday. Baillie Gifford & Co. cut its passive stake in Tesla to 4.25% from 7.67% as of Dec. 31, according to an SEC filing. The fund management company said the divestment was due to a so-called “enforced reduction” of its Tesla holding following the stock’s 435% rally this year.

“The substantial increase in Tesla’s share price means that we needed to reduce our holding in order to reflect concentration guidelines which restrict the weight of a single stock in clients’ portfolios,” Baillie Gifford wrote in a statement. “However, we intend to remain significant shareholders for many years ahead. We remain very optimistic about the future of the company.”

The fund added that “Tesla no longer faces any difficulty in raising capital at scale from outside sources but should there be serious setbacks in the share price we would welcome the opportunity to once again increase our shareholding”.

It has been a busy week for Tesla stock. The electric carmaker announced a plan to raise $5 billion by selling shares from time to time, through an “at-the-market” offering program. Furthermore, Tesla’s 5:1 stock split also went into effect.

Nonetheless, Merrill Lynch analyst John Murphy sees room for more gains. Murphy hiked TSLA’s price target to $550 (23% upside potential) from $350, citing “sliding scale of valuation based on the theoretical growth opportunity afforded to TSLA”. (See Tesla’s stock analysis on TipRanks)

“In our view, TSLA will utilize its stock to raise capital through low-cost equity offerings in order to accelerate aggressive capacity buildout plans globally and drive units/revenue substantially higher, further cementing its status as the dominant EV automaker,” Murphy wrote in a note to investors. “It is important to recognize that the higher the upward spiral of TSLA’s stock goes, the cheaper capital becomes to fund growth, which is then rewarded by investors with a higher stock price.”

The analyst, who kept his Hold rating on the stock, added that “the inverse of this dynamic is also true, and it is this self-fulfilling framework that appears to explain the extreme moves in TSLA stock to the upside and downside”.

The rest of the Street is in line with Murphy’s stock outlook with a Hold analyst consensus. The $268.25 average analyst price target now implies 36% downside potential in the shares over the coming 12 months.