- Tesla has finally been included in the S&P 500.
- With a valuation of around $400 billion, it immediately joins the index's 10 largest holdings.
- The bear case against Tesla is now in complete ruins, but the bull case rests on the assumption that it will grow beyond being an electric carmaker to becoming a sustainable-energy-and-transportation colossus.
- That could happen, but the conditions for Tesla's rise aren't good for healthy, 21st-century capitalism.
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Tesla made history last week when it became the most valuable company ever added to the S&P 500. After being snubbed in September, the carmaker has just joined an enviable financial club — and instantly became one of the 10 biggest holdings in the index.
The upshot of this momentous event is twofold. First, the short case against Tesla, already shot after the company went on an epic rally at the start of 2020, is now hopeless. Far more investors are going to be passively long Tesla's stock simply because index funds will buy the S&P, and Tesla with it.
Second, Tesla's ability to raise additional capital by issuing new shares should encounter little resistance, now that inclusion in the S&P 500 has effectively priced the company to perfection, at a market capitalization of around $400 billion.
Basically, it's now safe to stop fretting about Tesla. Elon Musk's never-boring, 17-year-old electric carmaker, with a history of falling short of expectations and taking investors on a wild ride, has made it. The end is no longer nigh, and the #TSLAQ bankruptcy crowd on Twitter should retreat from the field of battle.
Of course, it's also safe to borrow some of their arguments and take a look at how comically overvalued Tesla currently is, at $500 per share (and that price is adjusted for a five-for-one split that happened earlier this year).
A thoroughly 21st-century business opportunity
Here's why Tesla is thought to be worth more than General Motors, Ford, Toyota, and the VW Group combined: It isn't a mere car company. It's creating a new industry in which electric vehicles, solar panels, and sustainable energy storage are simply early aspects.
That's a thoroughly 21st-century business opportunity, potentially more lucrative than even the 20th-century advent of personal and mobile computing. The major automakers, meanwhile, are stuck in the olden days, tasked with spending billions every year to produce antiquated technology.
In the larger scheme of things, the bullish argument goes, building and selling cars is just a means to an end for Tesla. But bears have rightly pointed out that while Tesla's ambitions point to a future when sustainable transportation and energy are the norms, almost all the company currently revenue comes from … building and selling cars.
Taking a look at the auto sector, share prices have mostly been flat or down, with the exception of boutique names such as Ferrari. Until the COVID-19 pandemic hit, General Motors and Ford had underperformed the S&P 500 for years, but they both paid out handsome dividends.
Even with a serious bounce-back in the auto markets globally, carmaker stocks are mostly going nowhere. So all boats are not rising on a Tesla tide, and make no mistake, even if Tesla doubles or triples in size over the next half-decade, it won't be able to come anywhere near satisfying worldwide demand for automobiles.
So how do you get to a $400-billion market cap, with that understanding?
Easy money and Tesla's surge
The quick answer is that ever since the financial crisis, central banks have been flooding the world with money, and that money can't just sit around. The relentless quest for returns has buoyed equity markets and created the ideal situation for a mega-risk stock such as Tesla to outrun the fundamentals of its business. I don't think Tesla would have been possible without the financial crisis and loose monetary policy.
That's not a negative assessment. If easy money and government action on global warming have favored Tesla's fortunes, well … humanity might be thankful in 50 years if Tesla ends up producing millions of EVs and a climate catastrophe has been averted.
At any rate, we find ourselves now in a weird place with Tesla and the stock market. We know that it shouldn't be worth $400 billion, but the price-discovery mechanism in the marketplace, imperfect though it might be, has concluded that it is. So a rational analysis of the business that undergirds the stock is a waste of time: The logical conclusion has been completely invalidated by the fever dream of growth.
Maddening? Yes. But don't forget that although Tesla gets far more than its share of headlines, and although investors have showered it with favor, it's still just a medium-sized car company, serving primarily the luxury market. And until the tail end of 2019 through the third quarter of 2020, it hadn't shown that it could post routine profits, even while the global auto market was booming.
The only way for this to work, long-term, is for Tesla to become a 21st-century mega-corporation at the leading edge of an energy revolution. And even if that happens, Tesla would also need to be insulated from competition (it already is, to a degree, because it costs so much to establish a new car company).
Plus, there's no competition for Tesla to worry about
We now arrive at the critical question: Is there ever going to be any competition that Tesla needs to worry about?
I don't think so. Even automakers with serious EV goals, such as GM and VW, are really just aiming to replace their internal-combustion engines with electric drivetrains. Ultimately, they want to retain existing customers and protect against the Armageddon scenario of China's huge market becoming EV-dominated in the next few decades.
Competition in business has been collapsing for a long time, with very large firms gobbling up customers and absorbing potential competitors before they can achieve meaningful scale. The trend has intensified since the financial crisis, which effectively nationalized the business cycle and encouraged consolidation while making only the riskiest types of entrepreneurship worthwhile.
Tesla has thrived in this environment, and it has the stock price to prove it. That's why the company is wildly overvalued and could remain so … forever. Anyone who has been following Tesla since the mid-2000s has to get used to this. The market cap is unbelievable, but there it is, in the digital black and white of an online stock screen.
The sad consequence of this realization, however, is that Tesla's overvaluation could be of profound historical significance. Capitalism and competition are supposed to work invisible-hand-in-invisible-hand. Unfortunately, if the competition is disappearing, that unseen dynamic could die out, and no one would actually be paying any attention. Tesla prospers, but the system that gave birth to the company fades away.
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