Tesla’s insane stock price makes sense in a market gone mad

Tesla’s insane stock price makes sense in a market gone mad


Like a SpaceX rocket lofting a Tesla Roadster into orbit, Tesla stock is on a vertical trip into outer space. Since March, the electric car maker’s share price has more than quadrupled to a mind-boggling market value of $290 billion.

That makes Tesla, which reported second-quarter earnings Wednesday, the world’s highest-valued car company — if far from the largest. Of the 90 million cars sold around the world in 2019, Tesla sold 367,000. Take the two top-selling carmakers in the world, Toyota and Volkswagen, toss in Ford; the stock market still values Tesla higher than all three combined.

On Monday, Tesla stock climbed nearly 10%, adding $26.5 billion to its market value in a single day. It pulled back 4.5% on Tuesday, to $1,568.36 a share, then closed up about 1.5% Wednesday. Shares spiked more than 5% in after-hours trading when Tesla reported a net quarterly profit of $104 million.

Even Jim Cramer, the CNBC personality who has hyped Tesla stock plenty in the past, is astounded. Asked about Tesla stock on Twitter on Monday, he wrote: “I don’t even know if it is a stock. it is something else entirely, like a new species discovered in the wild.”

Or maybe it’s a more familiar beast, only supercharged. Tesla’s bewildering ascent makes more sense when you think of it as a hyper-exaggerated product of — and maybe a metaphor for — a stock market that itself has stopped making sense, at least by conventional measures.

Hovering near record highs amid a global pandemic and economic catastrophe, the market, like Tesla, highlights the degree to which equity prices have come untethered from current economic reality and future earnings expectations.

In both cases, prices are supported by the infusion of trillions of dollars of new money into the economy and by the steady growth of passive investing, in which money automatically flows in from 401(k) contributions and is put to work buying stocks, pushing prices higher. The potential inclusion of Tesla in the Standard & Poor’s 500 stock index adds upward pressure.

Then there’s the success of Chief Executive Elon Musk in crafting a beautiful-future narrative to explain why Tesla should be even more expensive than it is. Musk’s enormous compensation package is almost entirely tied to share price; on Tuesday, he qualified for an additional $2.1 billion worth of options after Tesla’s average market capitalization over six months exceeded $150 billion.

Narrative aside, there’s little in the company’s recent performance to justify such outsize enthusiasm. 

Although Tesla’s sales have grown steadily, there has been no sudden acceleration, and the company has repeatedly lowered prices. Tesla owes its string of small quarterly profits to government credits and aggressive booking of prepaid orders for a “Full Self Driving” technology that does not yet exist. Pay and bonuses — for workers, not for Musk — are being cut.

Overall, it’s hard to see Tesla, since it introduced the Model 3 in 2017, as a rapid growth company. (See chart.)

Tesla isn’t the only company whose rip-roaring market value is hard to square with the worst economy since the Great Depression.

In the classical analysis, stock prices indicate expectations of a company’s future profits. The cash can be used to reward shareholders through dividend payments or stock buybacks or reinvested in the company to fuel future growth.

The profit outlook for 2020 looks bleak across the economy. The Wall Street Journal reports 180 companies in the S&P 500 have pulled their earnings guidance, which has led to “the widest dispersion in earnings estimates among analysts since at least 2007.”

Yet the S&P 500, after an alarming plunge in March, is headed again toward record highs. As Robert Kaplan, president of the Federal Reserve Bank of Dallas put it recently: “If you see that kind of disconnect, it doesn’t go on indefinitely.”

Several forces have pushed stocks high and kept them there even as 32 million people in the U.S. have applied for unemployment assistance since February and COVID-19 infections have surged.

One is the Federal Reserve Board, which has injected trillions into the economy to ensure liquidity, engorged its balance sheet with assets that normally would be traded in established markets and created new dollars that could at some point spark inflation. It has even, for the first time, begun to buy junk bonds to help keep marginal companies and the hedge funds that invest in them afloat.

The Fed’s low-interest rates have the effect of making equity markets about the only avenue for meaningful returns. Middle- and upper-class people used to retire expecting to live largely on interest thrown off by their investments in bonds. Not now.

Whether the Fed’s efforts put people back to work in large numbers is yet to be determined, but so far they’ve helped stock and bond markets defy gravity.

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