is wisely ringing the cash register amid a stunning stock rally. Speculators should take notice.
The car company said on Tuesday morning that it plans to sell up to $5 billion in stock just two weeks before it is set to join the S&P 500. It would be Tesla’s second such share issue since September.
The sale is a no-brainer for Tesla’s long-term health. After all, the stock has more than doubled since August, when the company announced a share split, and it has rallied more than 50% in the three weeks since its planned index inclusion was announced.
The timing is no longer one of immediate need for liquidity: Tesla ended the third quarter with $14.5 billion in cash on its books. Still, opportunities to turn bubble stock gains into real cash shouldn’t be squandered. With this coming infusion, Tesla has likely assured its long-term corporate survival barring some extreme scenario.
But the long-term fate of its stock is far less certain. Tesla’s market value, which touched $600 billion on Monday, is nearly 10 times that of
which dwarfs Tesla in terms of market share, profitability, and financial might. Tesla trades at more than 1,200 times trailing earnings, while established automotive industry peers go for eight times or less.
Of course, such comparisons hold little weight with those who view the likes of
as analogous to a buggy whip manufacturer circa 1905. It doesn’t take much these days for Tesla to appreciate the equivalent of an established auto manufacturer’s market value in a single trading session. But stocks like Tesla that can rally so hard on relatively thin gruel can also sell off sharply without an obvious catalyst.
Tesla’s largest shareholder knows it, too: “Tesla stock price is too high imo,” Chief Executive Officer
said in a May Twitter post. The stock has more than quadrupled since that proclamation. Stock prices for other electric vehicle manufacturers around the world also have surged in defiance of any fundamental analysis.
Those unfortunate enough to have bet that fundamentals will reassert themselves have been run over repeatedly. True believers have suffered some jolts too, though: Tesla’s stock price has been cut in half twice since December 2018. Joining the S&P 500 offers no special protection against a similar selloff.
Given that backdrop, turning those paper gains into real cash is a perfectly wise and logical thing for Mr. Musk to do. Shareholders sitting on huge, ephemeral gains who don’t take that logic to its natural conclusion are risking a date with gravity.
Write to Charley Grant at firstname.lastname@example.org
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Appeared in the December 9, 2020, print edition as ‘Tesla Watches Its Stock Too.’