“If you see that kind of disconnect, it doesn’t go on indefinitely.”

A bubble in the middle of an economic collapse in the middle of a pandemic

Tesla's insane stock price makes sense in a market gone mad by Russ Mitchell

That makes Tesla, which reported second-quarter earnings Wednesday, the world’s highest valued car company — if far from the largest. Of the 90 million cars sold around the world in 2019 Tesla sold 367,000. Take the two top-selling carmakers in the world, Toyota and Volkswagen, toss in Ford; the stock market still values Tesla higher than all three combined.
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Hovering near record highs amid a global pandemic and economic catastrophe, the market, like Tesla, highlights the degree to which equity prices have come untethered from current economic reality and future earnings expectations.

In both cases, prices are supported by the infusion of trillions of dollars of new money into the economy and by the steady growth of passive investing, in which money automatically flows in from 401(k) contributions and is put to work buying stocks, pushing prices higher. The potential inclusion of Tesla in the Standard & Poor’s 500 stock index adds upward pressure.

Then there’s the success of Chief Executive Elon Musk in crafting a beautiful-future narrative to explain why Tesla should be even more expensive than it is. Musk’s enormous compensation package is almost entirely tied to share price; on Tuesday, he qualified for an additional $2.1 billion worth of options after Tesla’s average market capitalization over a six-month period exceeded $150 billion.

Narrative aside, there’s little in the company’s recent performance to justify such outsize enthusiasm.

Although Tesla’s sales have grown steadily, there has been no sudden acceleration, and the company has repeatedly lowered prices. Tesla owes its string of small quarterly profits to government credits and aggressive booking of prepaid orders for a “Full Self Driving” technology that does not yet exist. Pay and bonuses — for workers, not for Musk — are being cut.
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In the classical analysis, stock prices indicate expectations of a company’s future profits. The cash can be used to reward shareholders through dividend payments or stock buybacks, or reinvested in the company to fuel future growth.

The profit outlook for 2020 looks bleak across the economy. The Wall Street Journal reports 180 companies in the S&P 500 have pulled their earnings guidance, which has led to “the widest dispersion in earnings estimates among analysts since at least 2007.”

Yet the S&P 500, after an alarming plunge in March, is headed again toward record highs. As Robert Kaplan, president of the Federal Reserve Bank of Dallas, put it recently: “If you see that kind of disconnect, it doesn’t go on indefinitely.”
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One thing Tesla does have going for it is a constellation of commentators willing to sing its praises to infinity and beyond, though their convictions can appear shallow. Cathie Wood, chief executive of Ark Invest, regularly appears on CNBC to tell viewers Tesla stock will be worth $6,000 in five years. On July 1, Wood tweeted Tesla owners at some point in the future will each earn $10,000 in free cash flow every year by including their cars in a Tesla robotaxi network. But meantime, Ark regularly sells big chunks of Tesla shares. It sold nearly 140,000 Tesla shares the first two weeks of July alone even as Wood touted the company. Ark did not respond to a request for an interview.