Tesla shares rally for no reason

Tesla shares surpassed $1,800 for the first time today, the latest in an eye-popping run up of the stock that has propelled the company’s valuation to more than $341 billion.

Let’s put these numbers in perspective. Tesla, an automaker that delivered 367,500 vehicles in 2019 and is aiming to exceed the 500,000-mark in 2020, is worth more than the combined market valuations of America’s Big Three automakers: GM, Ford and Fiat Chrysler. Strike that, Tesla is now worth more than those companies combined by a factor of three and a half.

And while Tesla expects to deliver more than a half-million cars in 2020 — not a number to scoff at, mind, it’s material — Ford managed 2019 sales of 2.41 million in the U.S. alone. Fiat Chrysler sold 2.2 million cars in the U.S. during the same year, and GM managed 2.89 million. And Tesla is worth a multiple of their aggregate.

Why the gains?

There doesn’t appear to be any fundamental reason why Tesla’s shares rose more than 11.2% today to close at $1,835.64. Wedbush analyst Dan Ives apparently had a positive call today about Tesla, according to MarketWatch, but that’s only worth so much. Surely not a few dozen billion dollars.

The story here is valuation momentum at the well-known EV company that started this spring and has accelerated since Tesla recently announced plans for a 5 for 1 stock split.

Like a tiny snowball that has turned into an avalanche, the change is proving stunning. Consider where Tesla was two years ago. CEO Elon Musk had just tweeted that he had “funding secured” and was considering taking Tesla private at $420 a share.

Musk would later backtrack and Tesla would remain public. But the tweets and leaked emails that followed got the attention of the U.S. Securities and Exchange Commission, which later accused Musk of securities fraud. The parties reached a settlement without admitting wrongdoing. Under the settlement, Tesla agreed to add two independent directors and Musk would step down as chairman for three years.

The shares bopped along — spiking and then dropping, as volatile stocks are wont to do. Tesla shares reached a 52-week low of $211 in August 2019. The stock has risen around 770% since.

Valuing Tesla

It’s a running finance joke that whenever a company’s share price does something odd and inexplicable that the move was certainly based on the changing present value of its future cash flows. Such is the case today, when Tesla shares jumped sharply sans material news.

Surely the move was based on the changing present value of its future cash flows.

Jokes aside, Tesla shares are not comically overbought, measured using any normal financial metric you prefer. On a price/sales basis, for example, Tesla is trading at a multiple of around 13.7x its revenue, according to YCharts data. GM? A 0.38x revenue multiple. Toyota is worth much more than GM in price/sales terms, managing a 0.77x multiple, or about double.

But that’s a single-digit percentage of the revenue multiple that Tesla commands. Toyota’s price/book ratio of 0.98x. Tesla’s is 34.6x, again leaning on YCharts data.

It may be the case that Tesla is set to race past its rivals, secure the top position in the electric car market, run the EV show for a decade and shower its shareholders in dividends and buybacks. That’s how its stock priced today, at least. If it falls short of that investor expectation, expect some pullback at some point. And perhaps some more days when it just adds 10% for no reason.

You know, when the present value of its future cash flows appreciate by a tenth, sans news.

For fun, this is what Kirsten and Alex looked like today, trying to uncover why Tesla shares rallied:

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