Published on December 23rd, 2019 | by Zachary Shahan0
With Tesla [TSLA] Hitting $420, Can We Retire The Lame $420 Memes?
December 23rd, 2019 by Zachary Shahan
I’m a fan of hilarious memes, but the nonsensical memes fully aimed at smearing Elon Musk and Tesla have been old and boring since day 1.
I don’t want to get into a long essay here on the legality of the $420 tweet, but from what I read (and I read a lot), Tesla CEO (and Chairman at the time) Musk had enough of a commitment from certain wealthy players to take Tesla private if he and other shareholders thought that was the best thing to do. You may ask, if that’s the case, why did Musk settle? I’d say it’s because not settling would have meant a long and painful legal process against the SEC that would have been in the headlines almost every day that could have hurt Tesla’s actual business severely. But let’s now jump past that to get to the heart of this article — $420.
When Musk set the Tesla stock buyout price of $420 in his proposal to go private, it was clearly partially a joke, but it also came with logic. Musk shared some calculations he had done to come up with a figure very close to that price (a premium on the stock price of that time), but then always being the joker, he rounded the number to $420 (long a number associated with smoking pot, and thus the punchline of many a joke — for pot smokers as well as non-pot smokers). The general idea, though, was that shareholders would get a decent premium over the price of their shares at that time if they didn’t want to go private with Tesla.
That promise basically tried to reward people fairly who had bought the stock with an expectation that it would rise in the short term (the months or years following their purchase). At the same time, it seems every Tesla shareholder I heard from planned to hold onto the stock if possible because they expected the value of the company to rise much further than ~$75 billion. Many or most of us were not invested in the stock in the long term because we expected the stock to rise to $420, or even $500, in the coming 10+ years. We expected it to rise much higher than that (and still do).
By the way, if $420 was a crazy high price for TSLA, you’d expect that hitting this symbolic milestone would lead to a massive selloff of the stock. To the contrary, it is climbing higher as I write this. So, it seems the market as a whole does not see this as the peak.
So, the underlying point is: $420 appeared to be a fair enough price for going private last year. Yes, it’s taken more than a year for the stock to hit that value, but going private was supposed to be forever, or at least indefinitely. The price was supposed to fairly reward people who expected a return on their investment without being so high that it scared away investors who didn’t want to put too much faith in a company in the long term that no longer had to adhere to public reporting rules, who didn’t want much less liquid shares and less frequent opportunities to sell.
If not for how the whole process went, TSLA might well have hit $420 at the end of 2018 — who knows? Nonetheless, doing so now is not that far off in the grand scheme of things and I think shows that the price was fairly set for people who didn’t want to go private.
The other side of the trade would be people getting less liquid Tesla shares for whatever the going rate was on the stock market, or for $420, that they would have the opportunity to sell only once or twice a year. The expectation of any such buyers would be that $420 would be a good deal for Tesla shares in the long term. We are just slightly more than one year beyond “the tweet heard ’round the world.” We are not 5 or 10 years beyond it. We are not even 2 years beyond it. If anyone holding the stock right now thinks this is TSLA’s peak, well, it takes just a few seconds to sell shares. If anyone is planning their investments for 5 to 10 years out and thinks this price isn’t high enough, though, they could be waiting for $500 or $1000 or just planning to not sell until a certain year. Those are the people who were eager to go private with Tesla at $420. To them, $420 was never an infamous figure, and today is another indication of why.
Disclosure: Yes, I’m long TSLA. No, I do not provide investment advice and this article is in no way investment advice for anyone.
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