This guest commentary was written on 12/8/20 by Chief Market Strategist Mike O'Rourke of JonesTrading

Extremely Irrational Exuberance (What is Next For Tesla?)  - 07.23.2018 Tesla 8ball cartoon

The US equity market once again shook off a bevy of negative headlines as investors bought the opening dip and rode the rally to close in positive territory. Even Tesla which announced a $5 Billion At the Market offering rallied 5% to settle at new all time highs.

The company’s shares have rallied 60% and added $230 Billion in market capitalization in a little more than 3 weeks since Standard & Poor’s announced the S&P 500 index addition. That market cap creation in 3 weeks is equivalent to an entire Comcast or Adobe, or even the vaccine leader du jour - Pfizer.

It makes one wonder what is more important in the world right, a vaccine or an electric vehicle. This market thinks electric vehicles.

This is Tesla’s third equity offering in 2020. The company’s S&P addition a week from Friday will be a historic event due to its size and scale. Not just for the company, but for the entire market. The extremely irrational exuberance of this market environment exceeds that of December 1999 when Yahoo was added to the S&P 500. Yahoo was the leader in search, dominating its competitors Lycos, Excite and AltaVista.

Google was a little known startup that would not go public for almost another 5 years. When S&P announced the Yahoo index addition on November 30th, the shares were up only a paltry 80% year to date. Remember, it was only 1999, not 2020. Yahoo was the market darling of the day. Yahoo shares rallied 70% over the span of 5 trading days to its moment of S&P 500 inclusion. The next day the shares opened 7% lower, before eventually rallying 60% to peak on January 4th of 2000 with a market capitalization of $116 Billion.

There have been massive amounts free riders playing the Tesla index addition. The plan for many is to stay long and liquidate on or around the addition. With company’s current market capitalization index funds should have over 100 million shares to buy.

The market is clearly underestimating these firms that have grown to become the behemoths that dominate the equity market over the past decade. We suspect that they have a plan to not be left holding the bag. It could be pre-trading some, it could be post-trading some or buying a substantial block from Tesla. Simultaneously, for the Tesla and its capital intensive business, or even for Musk (who does not sell), this is a generational opportunity.

Today, Musk talked about debt retirement and a war chest. With such demand for your shares why carry any debt at all. With the rally that has occurred in recent weeks investors should anticipate a different outcome than the consensus. The continued rally into the December 18th close and everyone sells to the index funds is quickly becoming the least likely outcome.

One last fact to mention is that the company has been an astute seller in 2020, which is nearly impossible with your shares up nearly 700% year to date. With help from the pandemic Tesla shares dropped over 60% in a little more than a month after its February stock sale.

The shares dropped 30% within a week of the September stock sale announcement. That sale marked the all time high in the shares until the S&P index announcement.   


This is a Hedgeye Guest Contributor piece written by Mike O'Rourke, Chief Market Strategist of JonesTrading, where he advises institutional investors on market developments. He publishes "The Closing Print" on a daily basis in which his primary focus is identifying short term catalysts that drive daily trading activity while addressing how they fit into the “big picture.” This piece does not necessarily reflect the opinion of Hedgeye.