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Tesla’s joining the S&P 500 means it’s time to talk about how ridiculously overvalued the company is (TSLA)


Elon Musk

Summary List Placement

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 …read more

Source:: Business Insider

      

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