Tesla share price and the abundance of ‘possibly brilliant futures’
We look at Tesla’s recent decision to sell as much as $5 billion worth of fresh stock, as well as one investor’s comparison between the automaker and the famous Radio Corporation of America (RCA).
Is Tesla (TSLA) overvalued?
Anyone interested or involved in financial markets has probably been asked that question or spent time pondering it themselves in the last few years.
Maybe this theoretical and bold investor even considered shorting Tesla for themselves. This exercise, historically at least, has proven perilous for even the most savvy of individuals.
For example, the investment manager Jim Chanos has held a short position in Tesla since 2016, an enterprise which he has bluntly described as ‘painful’. Chanos recently said he had reduced, though not completely cut this short bet, saying that ‘We're not max short, but we are still short.’
TSLA is up tenfold since 2016 and 655% since January, 2020.
To be sure, this share price run has been backed up by a steadily improving operational performance. In Q3 Tesla reported revenue growth of 45%, gross profit growth of 63%, while also reporting that total production had risen 76%.
Off the back of all this, Tesla did what many were predicting Tesla would do: Sell stock and raise cash. In fact, before this was officially announced, in a now deleted tweet, Michael Burry, of Big Short fame, in a tweet directed at Elon Musk, noted that he had initiated a short position in TSLA. Mr Burry added:
‘Some free advice for a good guy … Seriously, issue 25-50% of your shares at the current ridiculous price. That’s not dilution. You’d be cementing permanence and untold optionality.’
Though well below the 25-50% level, Tesla revealed it would be looking to raise as much as $5.0 billion through the sale of upto 955,644,795 Common shares, as part of an 'at the market offering’, on Tuesday, December 8. Assuming this offering is fully taken up, Tesla would have a cash position of around $19 billion – ex-restricted cash.
Speaking of the company’s future, Mr Musk, in describing the reasons behind the share sale, said:
‘We thought we can retire a lot of the debt and increase the security of the company … have more of a war chest.’
Tesla finished out Tuesday's session at $649.88 per share, implying a market capitalisation of $616 billion.
A segue to 1929
Radio Corporation of America (RCA) was the ‘it’ tech stock of the 1930s. With operations focused on radio communications technology and a history of lofty double-digit sales growth, RCA had a ‘virtual lock monopoly on "wireless" communications for the masses’, according to The Eagle.
Despite this virtual monopoly, RCA didn’t pay dividends and its share price appreciation was built on uncertain ground. As Eugene White wrote in Journal of Economic Perspectives, in 1990:
'The only reason to buy RCA in the short-run or even the medium-run was the belief that its business would continue to thrive and the price of its stock would increase in the hope of dividends in the distant future.’
Mr White further added that:
'Not only were RCA's prospects uncertain but the absence of any dividend record left investors with little to judge fundamentals. Other high-tech firms and utilities, with no history of dividends and possibly brilliant futures, became favourites in the boom even though their fundaments were difficult to assess.'
But a lack of dividends wouldn’t stop speculators. Between 1925 and late 1929 the RCA share price surged from just $11 per share, to a peak of $114 per share, on a post-split basis – representing a gain of more than 1,000%.
To keep this example short: When markets eventually crashed in 1929, despite all of RCA’s grand innovations, the stock collapsed, losing 97% of its value in just a couple of years. By 1932 it traded for $3 per share.
Burry’s now removed RCA comparison
On Wednesday, 9 December, following Tesla’s announced share sale, Michael Burry, under the Cassandra handle, would tweet and then delete, the following:
‘100 year flood coming, and for similar reasons? $TSLA could be the next RCA! Having created NBC and RCA, Sarnoff "could rightly boast that he had introduced both radio and television as mass media."’
Burry’s point, in this now deleted tweet, seems to be that despite being a key innovator of its time, RCA still saw its share price crushed when the broader market collapsed.
Looking at Burry’s ‘for similar reasons’ point and assuming he is referencing the 1929 collapse – one explanation for how that bubble began, as forwarded in The Stock Market Boom and Crash of 1926-1933: An Applied Time Series Investigation, was that:
‘It all started with self-induced increases in the stock prices of a few companies pioneering the use of new technologies.’
Included on that list of tech innovators was Union Carbide, GM, DuPont Granger, and of course, RCA. That same study concluded that:
‘Our findings regarding the transmission of price shocks from the four innovative companies towards the more traditional ones suggest that these bubbles may have originated in investors’ imagination upon the arrival of new technologies invented by RCA, GM, Union Carbide, and DuPont. This financial contagion spread out rapidly, severely destroyed financial as well as economic values, and lasted at least until the beginning of the U.S. involvement in World War II.’
Tech, lead by a set of innovative companies like Tesla and the FANG cohort is indeed having its day. In the past five years the Nasdaq has advanced 176%, compared to the Dow’s 74%.
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