There are several good reasons to think
Tesla Inc.
TSLA 1.94%
should be more valuable today than it was six months ago. But there arent any that justify its shares more than tripling in price since then, let alone its value rising and then falling by the equivalent of
Ford Motors
capitalization in a day.Teslas shares stabilized a bit on Thursday, trading up less than 2%, a relief for market reporters who had run out of superlatives to describe the frenzy.
Just a few of the excesses: At its peak value of $174.7 billion on Tuesday, Tesla was the 30th-largest stock in the U.S. and by far the largest never to have made a full-year profit. Among the companies briefly smaller than Tesla in market capitalization were
Citigroup
and
HSBC,
two of the worlds biggest banks; burger chain McDonalds; and the entirety of the traditional U.S. car industry.
More than $55 billion of Tesla stock was traded on Tuesday, more than the next 10 most-traded stocks put togetherincluding technology giants Apple,
Amazon,
Alphabet,
Microsoft
and
Facebook.
There is no plausible fundamental justification for any of this. Tesla didnt suddenly prove it was on the road to high and sustainable profits, the competition didnt collapse and CEO
Elon Musk
didnt demonstrate a breakthrough technology. The good news in the last few months was that the Chinese production facility was up and running, the company doesnt think it needs to raise money this year and the fourth quarter went better than expected.
That justifies a bit more confidence that Tesla could succeed in becoming a profitable mass-market electric car maker, but such incremental improvement should justify only a slightly higher share price, not the ramp-up we have seen.
What about technicals? If Tesla makes a profit in the first quarterfor what its worth, analysts expect a loss of a few cents per sharethen Tesla will finally pass the S&P 500s financial viability test, making a profit over both 12 months and the latest quarter.
Given it is by far the biggest stock not in the benchmark, it has a good chance of being included in the index, prompting automatic buying by major index funds. Again, this could justify a pop in the price, perhaps as much as 5-7%, according to past academic studies. It doesnt justify the price doubling in a month, as it did up to Tuesday, or indeed falling 17%, as it did on Wednesday.
Desperate attempts by short sellers to buy stock to exit their positions are often behind such wild rises in share prices. The evidence on borrowed stock however doesnt support the idea that Tesla was driven up by a short squeeze, according to analysts including
Robert Sloan,
founder and managing partner of S3 Partners, which collects data on the stock lending required for short selling.
Instead, it seems to be about the close following Tesla stock has among individual investors. Its a very basic thing, says Mr. Sloan. This is the one stock where the average Joe says Im smarter than the Street.
The crowd following Tesla is so big that the company kicks off its quarterly conference calls with questions from private investors, rather than the Wall Street analysts who are usually the only ones able to quiz a CEO.
Mr. Musk is clear about his preference for private traders over bank analysts.
I do think that a lot of retail investors actually have deeper and more accurate insights than many of the big institutional investors and certainly better insight than many of the analysts, he said on last months call.
Yet, the volume in the stock suggests speculative day trading is dominating price moves. Individual investors dont seem to be putting Tesla shares aside for the long run.
Its very reminiscent of a number of stocks around 2000, says
James Clunie,
whose mutual fund at Jupiter Asset Management has been mauled by its short position in Tesla recently. Many of them vanished. A number went on to become winning companiesbut you still lost money.
Mr. Clunie points to chip maker
Qualcomm,
one of the best-performing stocks in 1999s dot-com bubble, before it burst in 2000. Qualcomm turned into a great success, but its shares only passed their January 2000 high for the first time three months ago.
Tesla supporters think the stock markets mistake was to price the stock far too cheaply last summer, rather than wildly overpricing it today.
The biggest shareholder in Tesla is holding on to its position at the moment. James Anderson, head of global equities at Edinburghs Baillie Gifford, says hes thrilled that his patience in sticking with Tesla has paid off. He argues that the recent Tesla news shifts the odds toward a greater chance that the company lives up to its potential, with evidence of a better competitive position and improved use of capital.
For him, Baillies 7.7% stake in Tesla is a long-term bet on a move toward green technology, something that should be reflected in stock prices. We think theres a technological (and societal) revolution starting, he told me this week. On the one side Tesla is the early sign of financial frenzy associated with it, on the other isnt it interesting that this has happened at the same time as collapsing oil equities?
Im deeply skeptical that Tesla can generate enough profitable growth to justify a valuation of about 183 times this years forecast reported earnings of $4.10 per share.
I expect fierce competition from traditional car makers to keep margins down, while I seriously doubt the prospects for a machine-learning breakthrough soon that allows Tesla to lead a self-driving revolution. As a result, of course, I have missed out on one of the biggest stock run-ups in history. Im fine with that.
Write to James Mackintosh at James.Mackintosh@wsj.com
Copyright ©2019 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8