What happened
Shares of Tesla (TSLA -1.66%) slid 11.4% in January, according to data provided by S&P Global Market Intelligence. The leader in electric vehicle manufacturing reported strong growth across the board in its fourth-quarter report, but it wasn't enough for investors, who collectively sold off the stock after the results.
On top of this, high-growth stocks like Tesla are seeing macroeconomic pressures from the threat of interest rate hikes by the Federal Reserve, which are likely to start happening this spring.
Image source: Getty Images.
So what
On Jan. 16, Tesla announced its financial results for the fourth quarter of 2021. Overall revenue grew 65% year over year to $17.7 billion in the period, and adjusted earnings per share (EPS) were $2.54. Both numbers beat the consensus Wall Street estimate heading into the results, but it was still not enough for investors to bid up Tesla stock, with shares falling the day after the report. In the days following the results, Tesla's stock traded with heavy volatility, making 5% moves up and down on different trading days.
Maybe more important than the earnings results (which were fairly in line with expectations) are the announcements from the Federal Reserve that it will likely start raising interest rates in March.
Why does this affect Tesla stock? Because when the Federal Reserve raises interest rates, it leads to higher yields on Treasury bonds. In turn, this makes it less attractive on average to own individual stocks because of the increased returns you can get from low-risk assets like Treasuries.
Many high-growth stocks have sold off after this sentiment change; Tesla is one of them.
Now what
Tesla stock is now down around 14% year to date. But given its ginormous run-up over the last five years, the company still has a market cap of $913 billion, making it one of the largest in the world by market cap. If you are an investor in Tesla or thinking of buying shares in the company, the market cap is what matters in making your decision, not whether the stock is down in the past month or up a significant amount in the last five years.
In the short run, interest rate hikes, broad economic developments, and market sell-offs could impact Tesla's share price. But over the long run, returns will be dictated by how much free cash flow it can generate compared to the price you pay for the stock.
