Achievement unlocked. In January, Elon Musk clinched the title of the world’s richest person for a few days after surpassing Amazon founder Jeff Bezos on Bloomberg’s billionaires’ list. Musk’s wealth skyrocketed by more than $150 billion in the past 12 months as Tesla’s share price surged 743 per cent in 2020. Tesla’s annual sales rose 36 per cent last year, and the world’s ‘buzziest’ enterprise is now worth more than Facebook at just shy of $835 billion by market capitalization. The company delivered 499,550 vehicles – only 450 units lower than the 500 thousand target Musk had set – even though the pandemic forced its sole U.S. assembly plant in Fremont, California, to shut down for several weeks back in March. Most notably, the company reported profits in the last four quarters after having only a handful of profitable quarters since going public in 2010, earning its place on the S&P 500 index.
The world’s wealthiest title is an extraordinary feat for Musk and Tesla, especially during a global health emergency that has disrupted the world’s economy and financial markets.
So, is Tesla worth $835 billion?
Probably not, but who knows? The value of any public company, unlike closely held firms, is governed by its share price. Financial analysts closely monitor that share price to determine a company’s fiscal health and to evaluate its stock price trajectory. Upon assessment, these analysts recommend a ‘buy’ or ‘sell’ based on earnings histories and price-to-market ratios, which signal whether a company’s share price adequately reflects its earnings. This data can gauge corporate longevity.
However, a company’s valuation is more visceral than just numbers. Tesla’s popularity is fueled by eco-conscious consumers’ goodwill to electric vehicles, cheered on by Musk’s ‘cult’ followers. Business valuation can blow up quickly by influencing brand reputation, earnings forecasts, and market appreciation. Aswath Damodaran, a finance professor at the Stern School of Business at New York University, states that three adjectives best measure a company’s worth: “possible, plausible, or probable.” If the market size makes growth possible, if the financials make it plausible, and if the future forecasts make it probable, it will likely survive the hype.
Tesla’s façade has always been its production targets, predicted to exceed 800 thousand by 2022. That will involve a lot of time and capital investment. Unless production experiences a bonanza, it will be difficult for the sales figures to match what the market speculates Tesla is worth. For this reason, Swiss investment bank UBS recommends selling Tesla, suggesting that the share price is too far out in front of its earnings.
Why is the stock market up when most economic indicators are down?
The stock market is not the economy. In the face of COVID-19, the financial market could not be more divorced from the world’s economy. The tickers you see on stock indices – i.e. APPL, GOOGL, AMZN – represent a fraction of businesses. They are publicly traded corporations. Even among this category, each index contains a smaller, more specific range of companies. The TSX focuses on Canada’s mining, energy, natural resources, and finance sector. The NASDAQ is primarily big tech. The Dow Jones is composed of industry powerhouses such as Walmart and McDonald’s.
Of course, public companies play an essential role in the economy. Still, the stock market does not reflect the 99 per cent of businesses that are not public-traded: the private companies that employ 90 per cent of Canadians and 60 per cent of Americans. These include our favourite Madison Avenue Pub, local restaurants, Kensington Market’s boutiques, electricians, etc.
Today, Tesla has become one of those ‘FOMO’ stocks. Invariably however, speculation trumps fundamentals when it comes to market appreciation. Even if Tesla generates profits throughout 2021, it can only make so much money selling 800 thousand vehicles.