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Tesla [TSLA] Stock Falls To ~$700?! Why!

I kind of just wanted this article to say, “Because company valuation almost never quadruples in four months and stays there,” but I figure that Zach wouldn’t consider that valuable Frugal Moogal analysis. This article will still be shorter than my usual fare, but here are some things to consider:

I kind of just wanted this article to say, “Because company valuation almost never quadruples in four months and stays there,” but I figure that Zach wouldn’t consider that valuable Frugal Moogal analysis. This article will still be shorter than my usual fare, but here are some things to consider:

Market Volatility

I want to point out a couple of things before certain commentators arrive and try to dance on Tesla’s grave.

First, I wrote in my article yesterday that, “I can’t honestly say that I understand why this movement is happening all at once and so suddenly, nor does it seem that anyone else does.” I also wrote, “I’m not going to pretend that I expect Tesla to continue a run of days where it gains 10%+, nor do I even think that it will necessarily stay at the current valuation. But, I also sure wouldn’t bet against it.”

That isn’t hedging my bets, but I’ve been part of a ride sort of like this before. When I first started investing, I did my research on a number of companies and carefully invested money into four that I felt had really solid futures. I didn’t have much extra money at the time, but I figured that if I invested into business sectors that I was familiar with and could study, I would probably do okay.

And to be honest, I feel like those three investments went fine. I had focused two of my investments on businesses that I knew had debt problems, but whose plans to recover from those issues I read through and thought they had a decent shot of pulling off their restructuring with high upside. One of those two companies went out of business. The other is worth nearly 20 times what I paid for it originally, and now boasts a quarterly dividend that is worth more than my initial investment in the company. The other two companies were solid earners that have continued to grow and pay me regular dividends — one of my rules for investing that I have broken with Tesla is the company needs to have a dividend I can believe in.

What does this have to do with Tesla? Well, regarding that part — not much. I did my work and I made investments that I still see as prudent because of the time I put into working on them. But, I got some emails at that point trying to get me to invest in other companies. These were the stocks of the future, they said, and I could get in on the ground floor.

I scraped together some money — I was in college at the time, so I was able to spare about $100 — and invested in one of the companies that email had told me to look at — Vertical Computer Systems, Inc.

I still can’t honestly tell you what Vertical does (stock ticker VCSY). Perhaps someone from the company will see this article and tell me. I didn’t research the fundamentals, I didn’t check to see what they were doing, I just knew that if I didn’t get in now (at that time), I would miss out!

At first, my decision seemed to be amazing. VCSY announced a 20 for 1 stock split on the common stock. Additionally, the stock had soared, reaching around $12 share at the time of this stock split — which, when I was looking at my shares that had all been bought for less than a dollar in the lead up to this, seemed pretty awesome to me. It was a 20 for 1 stock split because they figured they would be worth so much in the future that they needed to keep the stock price down to keep things reasonable for new investors.

If I had sold my shares of Vertical Computer Systems at the peak, I would have locked in enough profit to pay for two years of college.

But, alas, I didn’t. Instead, I watched the share price start to fall. In fact, I found a fascinating article titled “Vertical Goes Vertical” written by The Street that is still available if you want to find out more. At that time, it was already down a lot — the stock was worth 1 17/32.

I had figured this was a company that would execute in the future — on what, again, I don’t know — and I’d be back in this great situation.

Well, one major problem with that: As far as I can tell, Vertical had no real idea how to make money, so its stock price didn’t stop there. By the end of 2000, it was worth $0.14 cents a share.

I think it’s worth pointing out, as an investor, I generally put my money into something and don’t pull it out unless I feel something fundamentally changes with the company, or if I am in need of the money for a different sort of investment opportunity. I figured I would let Vertical ride and they would hopefully make me my money back one day.

As I write this, VCSY stock is worth $0.0064 per share. Yes, the number of zeros is correct. The investment that I made is worth a fraction of what I initially paid. (If you want to want to figure out about how much I left on the table at the peak, my portfolio reports that my VCSY stock today is worth around $10. It would have been worth approximately $18,750 if sold at $12.)

If you want to wonder why I still have it, quite frankly, it’s such a small position that until a few years ago, the fees to sell it would have been nearly the cost to keep it, so I figured why bother. At this point, since I can sell it without a fee, in some year in the future when I sell some of my other shares of stock, perhaps I’ll sell it to help offset capital gains I have made with more successful investments.

Hey, Frugal, Wasn’t This A Tesla Article?

Believe it or not, I haven’t forgotten that this is an article about Tesla, and to be doubly clear, I am not claiming by any sense that I expect that Tesla will repeat Vertical’s volatility. After all, Tesla actually has a product to sell, and a series of fundamentally positive signs for their future, something that if I would have actually done my research on with Vertical, I presumably would have realized didn’t exist with that company.

But, markets are fickle things. Just like pure emotion and fear of missing out (FOMO) drove Vertical to its highs, any time such an extreme movement happens, there will end up being an element that will make the settling point of the stock volatile. I can’t think of any times that a company’s stock saw a sudden, huge increase in value and then perfectly plateaued into a new normal.

What’s difficult about the market, and why you should never feel like you can “time” it, is that there does not have to be any clear signals why pricing moved the way it did. One of the interesting things that I heard yesterday after I published my article was Adam Jonas speculating that a lot of companies recently passed Tesla from their automotive analysts to their tech analysts.

If that’s the case, I do see that as a large potential driver of a more significant upside for the stock in the long term. However, those hopping in with no knowledge of what they are doing due to that FOMO thing are more likely to hop out at this point.

If you’re a bear reading this, however, I wouldn’t be so delighted that I compared Tesla to Vertical and think that Tesla is going to be worth pennies on the dollar in a few years and that you’re right. Tesla is still up 60% in the last month and 300% in the past 6 months, and I do not foresee any scenario where the stock gives up all of those gains.

If you’re going to go along for the ride with Tesla, expect more of this volatility as the market continues to try to figure out what the future really looks like. I remain comfortable with my investment and have no interest in selling. However if you don’t like this sort of ride, it may be more fun to watch than participate.

Disclaimer

I am a Tesla shareholder who has purchased shares within the preceding 12 months. Research I do for articles, including this article, may compel me to increase or decrease stock positions. However, I will not do so within 48 hours after any article in which I discuss matters that I feel may materially affect stock price is published. I do not believe that my voice could or should influence stock price by itself, and I strongly caution anyone against using my work as your sole data point to choose to invest or divest in any company. My articles are my opinion, which was formulated using research based on publicly available data. However, my research or conclusions may be incorrect.

 
 
 
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A businessman first, the Frugal Moogal looks at EVs from the perspective of a business. Having worked in multiple industries and in roles that managed significant money, he believes that the way to convince people that the EV revolution is here is by looking at the vehicles like a business would.

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