Tesla – The problem of capital misallocation

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Tesla shares rose to $313.38 this morning, giving the company a market capitalization of about $51 billion, surpassing GM for a moment as the most valuable American automaker. This left some industry insiders wondering about tulip bulbs.


Tesla Inc TSLA

Tesla Inc TSLABy Maurizio Pesce from Milan, Italia (Tesla Factory, Fremont (CA, USA)) [CC BY 2.0], via Wikimedia Commons


“It’s either one of the great Ponzi schemes of all time, or it’s all going to work out,” mused Mike Jackson, CEO of AutoNation, the largest dealer group in the US. He was speaking at a conference hosted by the National Automobile Dealers Association and J.D. Power. “It’s totally inexplicable, as far as its valuation,” he said.

As the chart chart illustrates, Tesla’s numbers don’t really match its valuation yet. The company produces a fraction of the number of vehicles that GM and Ford produce; it trails in revenue and has yet to become profitable. Tesla’s current valuation is driven by the belief that the future of mobility is electric and that the company has enough of a headstart to eventually dominate that future.

Wolf Richter writes that Tesla is ludicrously overvalued. But it’s not “inexplicable.” It’s perfectly explicable by the wondrously Fed-engineered stock market that has long ago abandoned any pretext of valuing companies on a rational basis. And it’s explicable by the hype – the “research” – issued by Wall Street investment banks that hope to get fat fees from Tesla’s next offerings of shares or convertible debt.

The amounts are huge, going back ten years: Last month, Tesla raised another $1.2 billion, after having raised $1.5 billion in May 2016. There will be more. Tesla is burning a lot of cash. Investment banks get rich on these deals. The bonuses are huge. So it’s OK to hype Tesla’s stock and sell it to their clients. Everybody wins in this scenario – except for a few despised short sellers who’re hung up on their silly notion of reality.

As long as shares continue to rise, the whole equation is perfectly validated: Let the doubters and short sellers stew in their own juices. Shares will rise because stock jockeys expect them to rise, and with that expectation, they buy them and drive up their price. Buy-buy-buy turns into a self-fulfilling prophecy. It won’t last forever. But until then, market share, profits, or anything else vaguely linked to reality simply don’t matter.

Tesla’s stock is the perfect thermometer of a stock market that has become such a bubble that even the Fed is getting antsy. But if history is the guide, you’re on your own.

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