By Raghav Madhukar
Elon Musk recently made headlines for surpassing Bill Gates’ net worth, securing the Tesla CEO’s spot as the second wealthiest person in the world. The latter’s fortune (currently valued at a whopping $ 128 Bn) rose in response to Tesla’s unwavering stock rally, which is set to finish the calendar year on a high.
Tesla has never ceased to perplex Wall Street analysts, often either outlandishly missing or exceeding earnings expectations. The eccentric billionaire founder’s erratic tweeting have not helped keep volatility and market perception under check. Nonetheless, Tesla’s share price this year has witnessed arguably the most successful bull run of any major listed company in recent American corporate history.
Starting the year at a share price hovering close to $86, it has grown nearly sevenfold to reach $598. At present, the stock is trading at an inconceivable P/E multiple of 1,185, carrying its market capitalization to $ 567 Bn – more than that of the world’s three largest automakers (Toyota, Volkswagen, GM) combined. The billion dollar question (literally) is what’s driving this unprecedented rally.
The consensus on this matter is attributed to three points. First, Tesla has successfully outperformed earnings expectations for four quarters straight. Second, on August 31, 2020, Tesla executed a 5:1 stock split bringing the share price down from $ 2,230 to a more affordable $ 446 (by giving investors 4 additional shares for each share owned). A stock split such as this one is perceived to be a positive indicator of increased investor demand (mostly on the retail end) for ownership. Third, Tesla’s forthcoming (December 21, 2020) inclusion in the S&P 500 is a symbolic event that marks its coming-of-age – a healthy sign of stability.
The contrarian view, however, asks: (a) Are these reasons sufficient to justify a 600 % rise in Tesla’s stock? (b) Are electric vehicle stocks in the midst of a bubble on track to burst sometime in the near future (like the dotcom bubble of 2000)? Famed ‘Big Short’ investor Michael Burry has openly touted his bearish outlook towards Tesla. He argues that Tesla’s market capitalization to revenue/profit ratio far exceeds that of most car manufacturers.
While the debate over whether or not Tesla is overvalued rages on, it is best to recall that stock prices are in the end a function of supply and demand. Evidently, in the past year, the demand to own Tesla stock has outpaced the demand to sell Tesla stock. Therefore, the key question is: in the current low interest rate environment how likely is a market correction?
The answer to that question is worth a billion dollars, and certainly much more to Mr. Musk.