Electrifying action - checking in on Tesla

J.P. Szafranski, BridgeTower Media Newswires

Tesla Inc. shares soared 12.6% on Oct. 25, an increase in market value of around $95 billion. For context, the TOTAL market capitalization of Ford Motor Co. is currently around $70 billion. Market commentators used to point to the novelty of Tesla’s value exceeding the combined equity market values of Ford and General Motors Co., despite the former’s struggles to post consistent profits. What a quaint notion. Tesla’s stock now produces one-day price swings as large as those competitors. Truly amazing.

To the credit of Technoking of Tesla/CEO Elon Musk and his team, the company has achieved meaningful profitability beginning in 2020. So, why did the stock move up so aggressively that day? The biggest apparent news came from a Hertz Corp. press release that announced an initial order of 100,000 Tesla vehicles for the rental company’s fleet through year-end 2022, along with an investment in electric vehicle charging infrastructure.

Mr. Musk seemed mystified at the stock price action as he tweeted in response that afternoon, “Strange that moved valuation, as Tesla is very much a production ramp problem, not a demand problem. “He also replied to a tweet on Nov. 1 that purported to thank him for Tesla’s recent stock price gains by saying “You’re welcome. If any of this is based on Hertz, I’d like to emphasize that no contract has been signed yet. Tesla has far more demand than production, therefore we will only sell cars to Hertz for the same margin as to consumers. Hertz deal has zero effect on our economics.”

Let’s first acknowledge Mr. Musk’s skillful ability to use the Hertz press release to further drive a narrative of unquenchable demand for Tesla vehicle with bullish undertones for profit margin implications while also displaying some skepticism about recent stock price action. Let’s hope he’s right about continued demand as the company has a lot of work to do to grow into its current valuation.

More importantly, what does it say about the market’s current state that a recently bankrupt company (Hertz) can put out a press release about its aspirational intentions, without a contract in hand, and move Tesla’s market value by 1.35x the size of Ford in a day? Hertz’s stock itself gained over 38% in the wake of this “news” through Monday, Nov. 1. Wild.

Just this morning as I write this column, shares of Hertz competitor Avis Budget Group Inc. climbed as high as 218% versus yesterday’s close. Why? On a call with analysts, CEO Joe Ferraro said, “You’ll see us going forward be much more active in electric scenarios as the situation develops over time.” There’s nothing tangible other than an expressed intention to add electric vehicles to the fleet and the company’s market capitalization more than tripled.
Totally normal.

I wish I had a well-grounded thesis for how investors might think about these strange market machinations. All I can say is that if you’re a Tesla short-seller, you’re NGMI.

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J.P. Szafranski is CEO of Meliora Capital in Tulsa (www.melcapital.com).