Making Sense of Tesla’s Run-up

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I would like to thank Rob Arnott, Andrew Cornell, Shuan Cornell, Richard Gerger, Eric Madsen, and particularly Aswath Damodaran for helpful comments on earlier drafts of this paper

Abstract

Tesla has run-up again. Between December 2, 2019 and April 30, 2021, the price of Tesla rose more than ten times creating over $600 billion in investor wealth. The analysis presented here implies that the 10x jump cannot be explained by the arrival of fundamental information regarding the macroeconomy, the auto industry, or company specific information related to Tesla as an electric vehicle manufacturer. The only feasible explanation for the run-up was a spreading narrative that Tesla is more than a car company. As stated by Mr. Musk, and echoed by Cathie Wood and others, Tesla is also going to be a renewable energy, artificial intelligence, ride sharing, and robotics company. Such narratives have the advantage that they can blossom and replicate with little in the way of capital expenditure and improvements in operations both of which tend to have a sluggish impact on value. They also benefit from a feedback effect by which spread of the narrative drives up the stock price and the rising stock price is then interpreted as evidence for the veracity of the narrative. Of course, the spread of a narrative and the feedback effect can operate in both directions. A narrative that arises, spreads, and drives stock prices to new highs can collapse just as quickly.

Introduction

Tesla has done it again. As Exhibit 1 shows, between the end of 2019 and early 2021, the price of Tesla rose dramatically creating over $600 billion in investor wealth. The exact size of the run-up depends on the dates selected, but whatever dates are chosen the price increase was on the order of 10x or more. The sample used here runs from the first trading day of December 2019 through the current date (as of the initiation of this research) of April 30, 2021. On December 2, 2019, Tesla was trading at a split-adjusted price of $66.97. On April 30, 3021, it closed at $709.44, a price increase of 10.6x. Had the high-water mark of $883.09 in January been used as the end date, the run-up would have been more than 13x. To make matters more extraordinary, the run-up did not begin from a low market value as was the case with an earlier Tesla run-up analyzed by Cornell and Damodaran (2014). On December 2, 2019, the market capitalization of Tesla was $60.3 billion compared to $51.3 billion for General Motors. By April 30, the market capitalization of Tesla had risen to $672.4 billion while GM had increased, but only to $81.9 billion.

Of course, there are other examples of huge run-ups during the same period. The most famous recent example is GameStop whose price gyrations even attracted the attention of Congress. But what makes Tesla unique is the sheer size of the value created. The more than $600 billion that Tesla added to its equity value during the sixteen-month sample period we study would have made it one of the ten most valuable companies in the world by market cap. During the period, the company, and its chairman Elon Musk, were at the center of a worldwide media blitz. No development, or even rumor, involving Tesla went unnoticed. Not surprisingly, Tesla was one of the most actively traded companies in the world. Given all of this attention and activity, if the change in Tesla’s value from December 2 to April 30 cannot be explained on the basis of fundamentals, it raises interesting questions regarding the concept of market efficiency.