Tesla Surge Continues Despite the Split and Capital Raise

The huge interest surrounding Elon Musk’s company continues. Tesla announced a 1:5 split effective September 1st, and the company outperformed the market, nevertheless.

Moreover, it creates tremendous problems for brokerage houses in the United States. Unprepared for the big number of accounts willing to buy Tesla’s shares, a few important brokerage houses crashed a couple of days earlier.

At $415 billion as its market capitalization showed last Thursday, Tesla is now bigger than the market capitalization of General Motors, Ford, Fiat Chrysler, Honda, Hyundai, Daimler, Ferrari, BMW, and Volkswagen. Combined!

Tesla Disclosed $5 Billion Capital Raise

Yesterday’s pre-market Tesla traded above $500 (that is after the stock split), and it seemed that nothing could spoil bulls’ party. The company announced a $5 billion capital raise – a dovish move normally.

The company’s share price did react immediately, but recovered throughout the session, fueled by strong interest from the retail community.

However, passive managers must be on the buying spree too. If Tesla’s addition to the S&P 500 becomes a reality, passive managers  must include its shares in the portfolio and sell some other names to offset it. This is exactly what happened in the last days – the general market dropping and only Tesla and a couple of other tech names advanced. However, the advance was so strong, it was enough to propel the stock indices higher given their weight in the index.

The stock market’s evolution in the United States during the pandemic is nothing short of amazing. Bubbles seem to be everywhere, but before labeling one, we must carefully consider the conditions for a bubble. Just because the price is rising dramatically, it does not mean that it is in a bubble.

Is Tesla’s share price sustained by the current valuations? No. In fact, it exceeded Visa in market capitalization. But if one compares the net income, or the bottom line, as it is often called, of the two companies, we see a huge difference. Tesla’s net income is 0.4 billion, and Visa’s $11.8 billion.

However, investing is not that straightforward as the numbers show. Valuing a company is based on emotions too. Sometimes investors own shares of a company just because it is fancy. Or, they like the name, the product, and don’t care about the numbers on the financial statements.

If that is the case, Tesla must have many fans around the world. Otherwise, it is difficult to explain its share price parabolic advance.

Broker discussion area