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TESLA Motors’ wild ride on the stock market took on a completely new dimension last week by recording the company’s biggest ever drop in share price and in doing so wiped $A100 billion off the value the market places on the company.

The price gyrations occurred at a time when three different factors were at play:

  • Tesla has split its shares five-for-one in a move designed to make the stock more affordable
  • Tesla was banking on being included in the S&P 500 but missed out
  • EV start-up rival Nikola has linked with General Motors on pick-ups and larger trucks

The price began to rise from August 11 when Tesla announced a five-for-one share split. That means for every Tesla share investors owned they now have five shares. The idea is to theoretically divide the share price by five so that it brings the price for each share more into the reach of smaller investors and could be seen as a cynical exercise in getting more of those drinking the Musk koolaid to pile in.

Getting to be included in the S&P 500 was also a big deal because it gives the stock respectability and tends to attract more serious share market investors. Many investment companies like pension funds religiously base their investment portfolios on the companies listed in the S&P 500 and don’t buy outside that S&P 500 list.

So the first setback that triggered the sell-off (apart from a bad day for tech stocks in general) was the bad news that Standard & Poors rejected Tesla and left them out for this year. That pretty much said that Tesla was not ready to be endowed and the market had been counting on that mantle to energise the share price.

At the same time, the news that EV start-up and Tesla rival, Nikola, had linked with General Motors on pick-ups and larger trucks was devastating.

Tesla fans are convinced that Tesla will wipe out the likes of GM, Ford and Chrysler and any bad news from the old Big Three on the EV front usually results in a surge on the Tesla share price because it confirms their view of the world through the Tesla lens.

But the reverse is the case when they see a big player like GM taking Nikola under its wing with manufacturing and technology benefits and investment worth billions to the EV and fuel cell start-up.

This can only roll forward the day when Nikola pick-ups and prime movers are coming up against (through GM showrooms you would imagine)Tesla’s controversial Cybertruck and its planned prime movers both of which have been announced to great fanfare but have gone missing in action.

Here is how the share price shellacking played out.

On August 11 Tesla was selling for $US275 a share. It then, over the next 20 days, added an astonishing $US225 a share to arrive at $US500 a share on August 31 when the offer for the share split closed.

But, eight days later, those who piled in at the top saw their dreams of riches evaporate as the stock slid by $US180 a share on September 8 to $US330 a share (although it recovered to $US370 in a correction in the following two days and is holding around that level).

But, during the surge, the market was valuing Tesla at more than the market value of Walmart which employs over two million people and is the largest retailer in the world. Walmart has revenues of more than $US500 billion while Tesla revenues are $US26 billion.

One stock analyst, AG Thorson, from FXEmpire sought to explain the extent of the bubble by taking the amount of revenue (sales) a company generates and asking how many days would it take for that revenue to equal the value the share market puts on that company.

His calculations showed that the Ford Motor Company would take 74 days based on its revenue to reach market value, General Motors would take 128 days and Walmart 255 days.

Tesla, he said, would take 14 years!

He also points out that the combined value the share market puts on Ford, General Motors and Fiat Chrysler, the North American Big Three, is $US90 billion and in 2019 they made 7.4 million vehicles. Tesla’s market value is 300 per cent greater than that – $US307 billion – and it delivered only 195,000 vehicles.

It is also worth pointing out, in case there is any doubt that this company is overvalued by the market, that the recent one-day fall in the market value of Tesla was about the same as the entire market value of Ford, GM and FCA combined.

However, Mr Thorson said that he thought the price of Tesla shares would start to reflect the true value of Tesla’s business during 2021. He thought that price would be about $US75 a share and that it would rise from there over time as Tesla built its sales momentum in the world market. And, he said, Tesla would eventually rival Apple’s market value. (Note: Mr Thorson said he did not own shares in Tesla).

The big unknown for Tesla is the company’s new dependence on China for sales revenue and, hopefully, profits followed by, also hopefully, a dividend.

This is a key play. Tesla has cleverly seen that many Western car-makers were saved during the past decade by sales they have made into the massive growth in the Chinese market.

For Tesla, China has become the biggest electric vehicle market in the world and Tesla opened a new factory in Shanghai late last year to cash in on this demand. Since production started, Tesla has sold 60,000 Model 3s in China and is second in the EV market behind BYD.

This success, and the promise this market holds for Tesla’s future, is also most likely to have been factored into the high-flying share price with buyers of the shares excited about the role China could play in Tesla’s future.

But this strategy, and maybe this was playing on the minds of those who bailed out a few days ago, will be wholly dependent on Tesla being immune to the new tensions that are emerging between China and the West.

When China gets in political standoffs with other nations, it has a habit of encouraging things like car buyers’ strikes against countries such as Japan or South Korea and more recently we have seen it take action against Australian barley and wine exports due to the federal government asking questions about the origin and spread of the coronavirus.

The US is also playing hard-ball in trade games with China and Tesla’s China strategy could easily fall apart if China choses Tesla as a pawn to play.

The problem with Tesla shares is that there are two types of stockholders. One lot are trying to invest in a promising new automobile company. The others are investing in Elon Musk’s dream and it is the dreamers who are over-blowing the value of the company because they are driven by emotion.

The only thing we know for sure is that the dreamers who piled in from August 11 until the crash around September 8 have already torn up a serious amount of money; on paper at least.

All they can do now is hang on to their shares and hope their fellow dreamers prevail and start piling in again because, if the hard-nosed business investors in the car company prevail over the share price, then the dreamers will awaken to a nightmare and be seriously torched.

By John Mellor

Dealer Solutions