18 August 2020 20:41
Text size Tesla stock hit $1,923 shortly after Tuesday's open—another record—adding to the incredible year the company is having. Shares were up 3.5% to $1,900.00 later Tuesday morning. The stock (ticker: TSLA) is up roughly 350% year to date and 750% over the past year. It is now worth roughly $355 billion, and more than $400 billion on a fully diluted basis—accounting for management stock options. The run has generated a lot of debate on Wall Street—not so much about why the stock is up, but why so much.
The impact that forthcoming S&P 500 inclusion and stock splits have had on the stock are two reasons often cited for the 33% month to date rise. It is possible, but Barron's still thinks those factors can't explain a jump of one-third. Tesla's most recent quarterly profit qualified it for inclusion into the S&P, which generates demand for the stock from index funds. And management announced a 5 for 1 stock split last week. Splits are supposed to generate more demand from individual investors. Both amount to technical factors that shouldn't make a long-run difference to company fundamentals. But people who bought the stock believing both were material catalysts are richer. Money helps win arguments on Wall Street. The quarterly profit recently reported definitely helped. In fact, the biggest reason behind the stock run is earnings. Tesla numbers have come in much better than expected for several quarters. And Wall Street's estimated 2021 earnings have gone from less than $12 to almost $15 a share over the past few months. Earnings momentum is a big deal. Wall Street has had an impact in another way, too. Bearish analysts are throwing in the towel. Tesla isn't widely loved on Wall Street. Six out of 36 analysts rate shares Buy and 13 rate shares Sell. The average Buy-rating ratio for stocks in the Dow Jones Industrial Average is about 55%. The average Sell-rating ratio is about 7%. Last week Morgan Stanley and Bank of America both upgraded shares to Hold from Sell and raised target prices. Upgrades help. Now the average analyst price target for the stock is about $1,200, up from about $300 at the beginning of the year. The 300% target price rise approximates the stock's rise year to date. Credit Suisse analyst Dan Levy wrote on Tuesday that Tesla's high stock price gives it a capital cost advantage over peers. It's an odd reason to be positive on a stock, but that was part of the Bank of America upgrade case as well. As the stock rises, it costs Tesla less in shares issued to build a new manufacturing plant. Wall Street is supporting Tesla stock, even if the support is begrudging. Another reason Tesla shares might be on the run is financial technology. That's Barron's new idea to help explain the "how high" portion of the Tesla stock run. Here's the thinking. Wall Street innovates, but unlike technologies such as iPhones or 5G and, the innovations can cause volatility and unintended consequences. For instance, the innovation of portfolio insurance helped catalyze Black Monday in 1987. The proliferation of credit default swaps helped create the financial crisis. Trading rules and automated traded were part of the story behind the flash crash of 2010. It takes a while for traders and investors to adjust to new things. Now, zero-commission trades and fractional share ownership on platforms such as Robinhood are new things. The precise impact is difficult to measures but it is part of the reason for volatility and wider-than-expected price swings in stocks these days—including Tesla. It might be a stretch, but academics will study free trading and write papers quantifying the effects later. And a new trading paradigm is as good a reason as any other. Write to Al Root at [email protected]