Just two years ago, Musk and Tesla’s shareholders agreed to a pay deal for the next decade: He gave up all salaries and bonuses, but if he could lead Tesla to its expected targets, such as performance and market value, he would receive 20.3 million Tesla shares in 12 installments (about 12 percent of Tesla’s outstanding shares).
Tesla’s market capitalisation needs to reach the minimum of $100bn, and for every $50bn (up to $650bn) increase, he will be able to get an incentive of 1.69m shares each time, equivalent to 1 per cent of Tesla’s market capitalisation.
The pay deal is a big bet for Mr Musk: if Tesla’s market capitalisation is less than $100bn, he will get nothing. In January 2018, Tesla’s share price hovered around $300, with a market capitalisation of just over $50 billion, and the company faced a severe dilemma of persistent losses, capital consumption and weak capacity, making it the biggest short-stakes target for the U.S. stock market.
Yet even at this low, Musk is confident that Tesla will become a multibillion-dollar and even trillion-dollar tech giant over the next decade. The pay deal, which Musk signed in 2012, was worth just $3 billion at the time. In five years, Musk has achieved a more than tenfold doubling of Tesla’s stock price, and has put his stake in more than $13 billion in value.
By the end of January 2020, Tesla’s share price had exceeded $600, making it the first U.S. auto company with a market capitalisation of more than $100 billion, more than the combined market value of the three traditional auto giants of General Motors, Ford and Chrysler. Two years after signing a second pay deal, Musk has finally achieved his first small goal, with a first-period bonus of up to 1.69 million shares. Based on Wednesday’s closing price, the first prize was $1.24 billion.
A speculative demon.
It was $330 at the end of November.
But a look back at Tesla’s share price shows that the stock is not a steady growth trend at all, but a go-up and downs. Until early December, Tesla’s stock price hovered above $300, barely rising over the past two years; it even fell below $180 at one point last May, giving it a market capitalisation of less than $25 billion. At the time, Tesla’s stock price was still in a dismal direction.
However, after the next six months of turmoil, Tesla’s share price over the past two months is like a SpaceX rocket. Tesla’s share price rose to $334 in early December, rising to $430 in early January, soared to $780 in early February, and even hit an all-time high of $969 on Tuesday, with a market capitalisation of more than $150 billion. In just two months, the stock has tripled;
This week’s crazy trend
In other words, Tesla’s record of a market capitalisation of more than $100 billion is the result of a frenzied push over the past month. Tesla’s shares rose 36 per cent in the first two trading days of the week, but after hitting an all-time high of $969 late on Tuesday, the company plunged 18 per cent on Wednesday, its biggest drop in history, falling as much as $707 at one point. Tesla surged to a high of nearly $800 in mid-session trading Thursday, closing at $748.96. Such a surge and plunge is reminiscent of Bitcoin.
It is important to explain that short-term speculation pushing up share prices does not make any real sense to Mr Musk himself. Because musk needs to maintain an average market value of more than $100 billion over six months to secure a market-cap incentive bonus under the compensation agreement. In addition, Musk’s shares could not be immediately cashed out, with a five-year thaw.
A super factory.
So what’s the reason for Tesla’s surge in share prices? Despite the unusually volatile stock prices, Tesla’s fundamentals are certainly a key factor, and this is Musk’s undeniable performance. In the past two quarters, Tesla has emerged from its previous losing, tight-capital and cash-strapped situation.
In two quarterly results at the end of October and the end of January, Tesla reported two consecutive quarters of profit, with revenue, profit and delivery results both above market expectations. Quarterly earnings are not easy for Tesla. Tesla has made a profit in just six quarters in nearly a decade since it went public in 2010. While Tesla still lost $980 million for the whole of last year, the cash squeeze has improved markedly, with free cash flow of $1.01 billion in the fourth quarter and a cash position of more than $6 billion.
In the fourth quarter, Tesla delivered a record 112,000 vehicles worldwide, both in production and delivery. Tesla delivered a total of 367,500 vehicles in 2019, up 50 percent from a year earlier, well above analysts’ expectations and meeting Musk’s previous sales target range. When Musk signed the first compensation agreement in 2012, Tesla delivered only 2,000 vehicles that year, reaching 76,000 in 2016;
More importantly, Tesla’s Shanghai Super plant was completed and put into operation in just one year, officially producing the Model 3 and starting the Model Y next year. Musk was “very grateful to China” and even danced at the Shanghai delivery site. Not only does this mean that Tesla’s undercapacity is cured completely, but it also means that tesla’s two models can open up the huge Chinese market at a lower price when they are localised. China is the world’s largest market for new energy vehicles, but the Chinese market currently accounts for only 13% of Tesla’s revenue and there is plenty of room for growth. Tesla’s share price is also entering a steady upward path after delivery at the Shanghai Super plant began. In addition to the Shanghai plant, which has already been completed and put into operation, Tesla’s Berlin plant is also under intense planning and is expected to start production of batteries and vehicles next year.
In addition to the popular economy sedan Model 3, the model, which went on sale early in March, is a big plus for Tesla’s future. Model Y and Model 3 share three-quarters of the components, but are priced higher than the Model 3, which means Tesla can get more profit margins. Tesla, on the other hand, has opened up a huge new market. The avant-garde electric pickup Cybertruck received 200,000 orders three days after its launch, not only the world’s second-largest car segment, but also the hottest-selling mainstream model in the U.S. The U.S. market sold 2.9 million pickup trucks in 2018.
A multi-air melee
Come back to the question, and while Tesla has come out of its long-term predicament and entered a stable growth space and opened up a whole new market, can its fundamentals hold up a market capitalisation of hundreds of billions of dollars? While Tesla has a market capitalisation of more than twice as much as GM and Ford, it delivers less than 400,000, a fraction of GM’s and Ford’s more than 10 million deliveries.
Traditional p/es ity and market-to-earnings ratios don’t apply to stocks like Tesla, and investors value the future growth space in the electric car market that Tesla represents and the market share tesla occupies. Although the electric car market is slowing down due to immature battery technology and government subsidies (u.S. EV grew by only 9% last year), there is still plenty of room for growth in the long run, with electric cars accounting for just 2.2% of the global auto market in 2019. Major traditional auto makers are also seriously building new models to join the market. Japan’s Fuji data predicts that the global all-electric car market will grow from 1.3 million in 2018 to 22 million vehicles in 2035, and Tesla has taken a clear lead and brand advantage. Last year 300,000 Model 3s were shipped, even accounting for 14% of the global electric car market in 2019. In the U.S. all-electric car market, Tesla’s market share is even more than three-quarters.
But what’s more undeniable is that behind Tesla’s surge and plunge, the more push is from speculative money than investors who are bullish on the outlook. Tesla has been the biggest bear in the U.S. stock market, but as the stock price rose steadily at the end of last year, shorts were forced to make up their positions en masse at the start of the year, leading to a shortage of stock supply and forcing the closing of positions to soar. Shorts have lost more than $8 billion so far this year, according to S3 Partners, a market research firm. On the other hand, the bulls that drive up share prices are making a lot of money. In Wall StreetBet’s Reddite group, a long-term man posted a screenshot of a call option he put in for Tesla at the end of last month for $126,000, which was valued at $4.3 million on Tuesday. A user of the trading platform Robinhood also earned a return of up to 26 times in a month through call options. And Tesla’s share price plunge on Wednesday is more likely to be the bulls starting to cash out.
While Tesla’s share price has soared, Wall Street analysts have remained calm. Wall Street’s target price for Tesla is just $470, according to Bloomberg data. Only seven analysts gave a “buy” rating, 12 gave a “hold” rating and 18 gave a “sell” rating.
In The current high share price of Tesla, the fundamentals and speculators are pushing for three or seven, or four six? It doesn’t matter, Tesla has always been a hot stock for speculators. Even for long-term holdings, the current price is a bit high, and short-term speculation requires more caution. Citron, a well-known short-sing agency, has even publicly said that while they promise never to short Tesla, tesla has become a Wall Street casino and that musk would be tempted to short the stock if he was a fund manager himself. (Zheng Jun)