Feb 6, 2020 - Economy & Business

The vindication of Elon Musk

Photo Illustration: Sarah Grillo/Axios. Photo: Jörg Carstensen/picture alliance via Getty Images

Tesla stock has been in Ludicrous Mode for the past few days. Given its bonkers gyrations, it's now easy to see why CEO Elon Musk might feel that he was right all along in wanting to take the company private back in 2018.

"As a public company, we are subject to wild swings in our stock price that can be a major distraction for everyone."
— Elon Musk, "Taking Tesla Private" blog post, August 2018

How it works: Tesla's rising share price this year has been good for Musk's pay package and his wealth, but it has also turned the stock into an arena for short-term, high-stakes gamblers.

  • In the first three days of this week, $157 billion of Tesla stock changed hands. For gamblers, it was more popular than Bitcoin, which saw $96 billion of volume in those three days. Tesla even approached the $198 billion of volume in SPY, the benchmark S&P 500 ETF that's the most popular playground for day traders.
  • Compare Apple, with its awesome $1.4 trillion valuation: It had $107 billion in volume over three days, much less than Tesla, which is worth roughly a tenth as much.
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Chart: Axios Visuals

The stock market is failing at its primary role of price discovery, the determination of how much securities and companies are worth. There's no rational reason — and certainly no news — explaining why Tesla's value should have fluctuated by more than $20 billion per day.

  • This wasn't a short squeeze like the famous VW run-up in October 2008, when the German carmaker briefly became the most valuable company in the world. In that case, the quantity of shares available to buy was much lower than the amount that short sellers had sold. But in this case, even if all the Tesla shorts were forced to cover their positions at the same time, that would account for less than one day's trading volume.
  • Other possible explanations like delta-hedging call-option volume (don't ask) similarly can't come close to explaining the magnitude of the price swings and high volume that Tesla stock is seeing.

Be smart: A stock that can melt up for no particular reason can just as easily melt down.

When the share price is as volatile as this, valuation feels more like a sugar high than the true wisdom of the crowds, and a buy-and-hold strategy feels like utter foolishness. Hedge fund manager Cliff Asness has argued that the price opacity of private markets has significant positive value. If that's the case then Tesla in particular should probably be private.

Flashback: Musk said in 2018 that he wanted to take Tesla private at $420 per share, which corresponded to a valuation of $76 billion. At the time, that was a significant premium to the open market price.

  • The bull case for Tesla is predicated on the company raising another $10 billion in equity capital, plus possibly much more than that in debt. Public investors don't like that kind of dilution, but a private investor willing to buy the company for $76 billion in 2018 would probably be happy to put another $10 billion in right now.

The bottom line: If Tesla is going to be a vehicle for speculators, it should be one in which they sit behind the wheel, rather than one they buy on the Nasdaq.

Go deeper

Tesla raises more than $2 billion in secondary stock offering

Photo Illustration: Sarah Grillo/Axios. Photo: Jörg Carstensen/picture alliance via Getty Images

Tesla raised $2.03 billion in a secondary stock offering, pricing at $767 per share. That's a 4.6% discount to yesterday's closing price, and an 86.2% premium to where CEO Elon Musk infamously tweeted that he had "funding secured."

Why it matters: Momentum floats apparently are a thing now, as this comes just two weeks after Musk said on an earnings call that "it doesn’t make sense to raise money because we expect to generate cash."

GM is eating Tesla's exhaust

Tesla Model 3. Photo: Smith Collection/Gado/Getty Images

While Tesla shares went into Ludicrous Mode this week, GM executives were on Wall Street pitching investors on their own vision of an electric, self-driving future. But as Bloomberg notes, the market isn't buying.

Why it matters: GM may be investing billions to transform its business for the future, but to many investors, Tesla's lead in the fledgling electric vehicle market is seen as insurmountable.

NTSB warns about lax oversight of new car tech

Illustration: Sarah Grillo/Axios

There's mounting evidence that people put too much trust in driver-assistance features like Tesla Autopilot, but federal regulators aren't doing enough to ensure the systems are deployed safely, experts say.

Why it matters: Nearly 37,000 Americans die each year in highway accidents. As automated features become more common, the roads could get more dangerous — not safer — if drivers use the technology in unintended ways.