Saturday, December 04, 2021 11:11:53 AM
Why Tesla (TSLA) Skyrocketed During the Pandemic
Can the electric car maker sustain its momentum?
In January 2020, Tesla, Inc. (TSLA) was valued at $117 billion by the stock market. By the end of the year, that figure had skyrocketed to $658.39 billion. Subsequently, Tesla's stock traversed the distance to a $1 trillion market cap in less than a year, reaching that milestone on Oct. 25, 2021.
The stratospheric rise in Tesla's shares within a short span of time has confounded investors. It also raises an important question: can the factors that propelled Tesla to a trillion-dollar valuation during the pandemic help sustain its momentum afterwards?
KEY TAKEAWAYS
The increase in Tesla's stock price and market cap has created a financial complex of investment products that include or track the electric car maker's stock.
Average trading volume in Tesla options exceeds that in S&P 500 options.
The financial complex has helped Tesla finance the next round of its evolution as a major car manufacturer.
The Tesla Financial Complex
While retail investors (and CEO Elon Musk’s tweets) have played a major role in Tesla's ascent, at the heart of the electric car maker's meteoric rise lies what the Financial Times terms a "Tesla financial complex."1 Included in this complex are an assortment of investment products—options, equity-linked funds, climate tech-focused investment vehicles—and they exert a massive influence in the equity and derivatives markets.
The relationship between the stock and members of this complex is symbiotic. As Tesla's stature grows in the markets, funds and derivatives with exposure to the stock generate outsized returns, leading fresh investors to pour money into it and further increase its influence. For example, in July 2018, the Tesla was a holding in 106 exchange traded funds (ETFs). By December 2021, it became a holding in 244 ETFs.23
Tesla's entry into the S&P 500 in December 2020 has further exposed funds tracking the index to the company's stock, and they have reaped the rewards of its price run-up. The company joined the S&P 500 with a weighting of 1.6%. By the beginning of November 2021, it was weighted at 2.5% of the index and had contributed almost a quarter of the index's returns.4 A similar story played out in the Russell 1000, where Tesla accounted for 4% of the overall weighting in November.
In the Morningstar Consumer Cyclical Index, Tesla has contributed 27.98 percentage points to the index's 95.24% gain in the past two years. Online retail behemoth Amazon.com, Inc. (AMZN) was a distant second with a contribution of 16.92 points.5
According to a recent report by investment firm Goldman Sachs, the nominal trading value of Tesla options averaged $241 billion a day in recent weeks. For context, average trading volume for the rest of the S&P 500 excluding Amazon was $112 billion. Goldman has attributed the explosion in options trading within the United States to Tesla, calling it a "critical driver of the market."6
Typically, options are a risky bet on an underlying equity's future price movement. The leverage risk, inherent in most options, is reflected in a stock's price volatility. While Tesla's stock is prone to wild swings, its rise has also been accompanied by a corresponding change in the perception of risk in the markets.
The electric car maker's choppy ascent since its debut in the stock market in 2010 has frequently been punctured by short sellers, who claim that electric vehicles are expensive and have no future.7
The pandemic changed that calculus. Intensifying debate about climate change coupled with the current administration's green subsidy push and record delivery numbers (although they still lag those of established car manufacturers by a wide margin) have helped push Tesla past the $1 trillion mark.
Should Investors Expect Further Gains?
During times of excess, fundamentals take a backseat. And so it has been with Tesla. Even though the company makes a fraction of the cars of its competitors such as Ford Motor Company (F) and General Motors Company (GM), it sported roughly five times their combined market cap in December 2021.8 Much of the heft in Tesla's valuation (and associated financial products) comes from the promise of a future dominated by electric vehicles. At present, that world does not exist, making Tesla's current valuation seem outlandish.
Drew Dickson, chief investment officer at Albert Bridge Capital, told the Financial Times that valuations nowadays are driven by a "huge, recursive 'tail wagging the dog' nature," meaning they are based on expectations of the future rather than present reality. "I'm unwavering in my belief that ultimately the fundamentals are what matters," he said.1
While it has artificially inflated the company's valuation, the financial juggernaut machine behind Tesla's wild pandemic ride in the markets has also helped bolster the company's fundamentals. The flow of investors pouring money into Tesla's stock and associated financial products helped finance its investments into manufacturing infrastructure. The company's reliance on bonds, which require regular payments, has lessened.
Last year, Tesla issued $10 billion worth of new equity at prices that were approximately nine times that of 2019, to capitalize on demand for its shares.9 That capital infusion has helped the company inaugurate new factories in Austin and Berlin. Once they become operational, along with its factories in Fremont and Shanghai, the company should kickstart into high gear with its vehicle delivery.
Recent TSLA News
- Anglo American Rejects BHP Group’s Offer, Toyota Invests $1.4 Billion in Indiana, and More News • IH Market News • 04/26/2024 11:48:07 AM
- Futures Pointing To Sharply Lower Open On Wall Street • IH Market News • 04/25/2024 01:09:21 PM
- U.S. Futures Drop in Pre-Market Trading as Tech Stocks Plunge After Meta Issues Gloomy Forecast • IH Market News • 04/25/2024 11:53:54 AM
- U.S. Stocks Finish Lackluster Session Little Changed • IH Market News • 04/24/2024 08:33:00 PM
- Block Innovates Bitcoin Mining, DOJ Proposes 3-Year Prison for Changpeng Zhao, and More Crypto News • IH Market News • 04/24/2024 05:50:55 PM
- Upbeat Earnings News May Lead To Extended Rebound On Wall Street • IH Market News • 04/24/2024 01:09:05 PM
- U.S. Futures Display Mixed Results Amid Earnings, WTI and Brent Crude Prices Dip in June Futures Trading • IH Market News • 04/24/2024 11:31:20 AM
- Tesla Surges 12% with 2025 Affordable Vehicle Promise, Evotec Slumps 36% on Uncertain Outlook, and Latest Earnings • IH Market News • 04/24/2024 11:29:58 AM
- Coca-Cola and Microsoft Sign Billion-Dollar Agreement, Apple Event Set for May 7, and More News • IH Market News • 04/24/2024 11:28:02 AM
- Stocks Close On Firm Note For 2nd Straight Day On Earnings Hopes • IH Market News • 04/23/2024 09:00:38 PM
- Tesla Releases First Quarter 2024 Financial Results • Business Wire • 04/23/2024 08:09:00 PM
- Futures Pointing To Extended Rebound On Wall Street • IH Market News • 04/23/2024 01:11:27 PM
- U.S. Index Futures Rise in Pre-Market, Oil Prices Dip Slightly • IH Market News • 04/23/2024 11:26:41 AM
- Apple Loses Market Share in China, GM Surges in Pre-Market Following Upward Revisions for 2024 Projections, and More News • IH Market News • 04/23/2024 11:25:34 AM
- U.S. Stocks Close On Bright Note Despite Coming Off Day’s Highs • IH Market News • 04/22/2024 08:38:04 PM
- Despite Record EV Production Numbers, Shortage of Battery Metals Looms • PR Newswire (US) • 04/22/2024 03:24:00 PM
- Despite Record EV Production Numbers, Shortage of Battery Metals Looms • PR Newswire (US) • 04/22/2024 03:23:00 PM
- Despite Record EV Production Numbers, Shortage of Battery Metals Looms • PR Newswire (Canada) • 04/22/2024 03:23:00 PM
- Li Auto Stock Drops 7.3% Amid Tesla Price Cuts, Salesforce Retreats from Informatica Deal, and Other Market Updates • IH Market News • 04/22/2024 12:09:21 PM
- Nasdaq, S&P 500 Extend Losing Streaks On Tech Weakness But Dow Advances • IH Market News • 04/19/2024 08:32:14 PM
- Paramount’s Shares Surge Following Sony and Apollo’s Joint Bid; ISS Backs Berkshire Hathaway Director Re-election, and More • IH Market News • 04/19/2024 11:31:22 AM
- Apple to Invest $250 Million in Singapore Expansion, Oracle Commits $8 Billion to Japan Infrastructure, and More News • IH Market News • 04/18/2024 11:11:52 AM
- United Shares Surge 5.3% in Q1 2024 Earnings Beat; Take-Two Cuts 5% of Workforce, and More News • IH Market News • 04/17/2024 10:57:39 AM
- Ericsson Soars with 66% Net Profit Growth; Live Nation Under Antitrust Scrutiny in US, and More News • IH Market News • 04/16/2024 11:18:19 AM
- Tesla Cuts 10% of Workforce, VP Resigns as Shares Fall 4% • IH Market News • 04/15/2024 06:42:49 PM
Bantec Reports an Over 50 Percent Increase in Sales and Profits in Q1 2024 from Q1 2023 • BANT • Apr 25, 2024 10:00 AM
Cannabix's Breath Logix Alcohol Device Delivers Positive Impact to Private Monitoring Agency in Montana, USA • BLO • Apr 25, 2024 8:52 AM
Kona Gold Beverages, Inc. Announces Name Change to NuVibe, Inc. and Initiation of Ticker Symbol Application Process • KGKG • Apr 25, 2024 8:30 AM
Axis Technologies Group and Carbonis Forge Ahead with New Digital Carbon Credit Technology • AXTG • Apr 24, 2024 3:00 AM
North Bay Resources Announces Successful Equipment Test at Bishop Gold Mill, Inyo County, California • NBRI • Apr 23, 2024 9:41 AM
Epazz, Inc.: CryObo, Inc. solar Bitcoin operations will issue tokens • EPAZ • Apr 23, 2024 9:20 AM