Published on July 20th, 2020 |
by Vijay Govindan
July 20th, 2020 by Vijay Govindan
As we were sipping daiquiris atop CleanTechnica’s infinity pool and staring into the azure waters of the Gulf of Mexico, we were struck by a thought: Has Tesla’s market cap reached escape velocity?
For those of you not bothered by the daily shenanigans of the stock market, Tesla rocketed past $300 billion in market cap earlier in the day. This is above well known US names such as Netflix, Intel, Berkshire Hathaway, Nvidia, Home Depot, and United Healthcare. It was just a month ago that Tesla overtook Toyota in market cap (controversially, from the comments in my last article), as well as reigning energy champion Exxon. There is no doubt anymore. My youngest daughter dubbed the moment “In your face, gas buckets.”
What are Some Reasons for Tesla’s Ascent?
Although cause and effect are nebulous when it comes to the stock market, there are a few reasons that seem clear as to Tesla’s move higher.
1. General market moving up from COVID-19 lows
2. Nasdaq (of which Tesla is a part), making record highs
3. EVs having increased sales across the board while fossil fuel sales plunged due to the virus
4. Tesla’s Battery Day is upcoming
5. Tesla’s continuing march to Full Self Driving
6. Tesla is working on multiple plants to expand production
7. Tesla’s surprise beat on Q2 deliveries
8. Tesla’s expected inclusion into the S&P 500
9. Major investors front-running the S&P 500 inclusion
10. Short selling
I am not going to focus on items 1 to 6. They provide the backdrop necessary to discuss items 7 to 10. Number 3 is worth calling out. It’s not just Tesla that reported increasing EV sales in Q2. Nio, Xpeng, and BYD have all done well. Europe continues to embrace EVs. Sunrun and Vivint are creating a joint powerhouse in the residential energy space. People see the trend. Investors want to invest in what is growing, and dump what is not. We continue to see investments in Rivian, Lucid Air, Nikola, Lordstown Motors, Fisker, and others. We see shale bankruptcies, natural gas pipelines stopped from production, and low oil prices. There is a saying, when money moves, money is made. Right now, the money is moving into renewable energy and away from fossil fuels.
Tesla’s Surprise Beat on Q2 Deliveries
Frugal Moogal nailed where Tesla would be on Q2 deliveries. This beat Wall Street estimates. Based on this, some bright institutional investors got the idea Tesla would report positive earnings in Q2. This would be four quarters in a row of positive earnings, which would allow Tesla to be included in the S&P 500 index. These major investors started front-running the S&P 500 index followers. In simple terms, they bought Tesla [TSLA] early, knowing that when the announcement came that S&P 500 would add Tesla to the index, they could unload their shares to the latecomers (also known as bagholders).
CNBC summarized it nicely here. This would cause a powerful move, and that is in addition to the fact Tesla might be the first stock in US history to have $20 billion in shares shorted. The poor bastards have reportedly, in theory, lost about $18 billion in Tesla from the beginning of the year, and $4 billion alone in July. Shorts are the power for any dramatic move higher.
Factors 7 to 10 combined in an unholy vortex and pushed Tesla higher, to the glee of longs, and befuddlement from shorts. Just think, how many factories Tesla could have funded with that kind of money.
What Happens Next?
The violent explosion of Tesla shares higher will reach a temporary limit. Funds that are long will reach limits or book profits (as we saw last week). New shorts will enter. All will be known on the Tesla Q2 earnings call on July 22nd. S&P 500 inclusion will not happen right away. Therefore, it’s a good bet Tesla consolidates in a range at some point, as supply and demand balance out.
The investment in Tesla has caused other renewable energy players to move higher or file for IPOs. It has made Elon incredibly wealthy. What will Tesla do with its newfound market cap? As I have mentioned before, it can take out an old-school auto competitor, make some investments in cleantech, issue shares and build factories — or, it can do absolutely nothing, my preferred option.
If anything, the options owned by employees will allow many of them to retire. Perhaps, they will use their money to invest in more cleantech companies and spread their knowledge.
The success gives Tesla the ability to continue hiring the best in software, factory automation, and autonomy. This will further increase its lead over competitors, who have generously given Tesla a decade head start. Cleantech and renewable energy look to have a bright future. Now, the market is coming around to the same conclusion.
Disclosure: I own shares of Tesla, Nio, and Workhorse at the moment. Nothing above is investment advice of any sort.
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