Published on May 12th, 2020 | by Frugal Moogal0
[TSLA] — It’s All An Opinion, IMO
May 12th, 2020 by Frugal Moogal
I was reading through the comments on my recent Tesla earnings call article, and an interesting comment caught my eye from PragmaticCitizen. That statement was:
“As a shareholder, this is obviously an op ed.”
I thought this was obvious, but in fact, my articles analyzing Tesla’s stock are, in fact, opinion pieces. Actually, so is pretty much everything written about Tesla’s stock price, as well as Tesla’s stock price itself.
To explain, let’s take a quick look at how the stock market works, and examine what I think you can learn from Tesla’s stock price when you realize it’s an opinion.
How the Stock Market Works
I could write a 5000 word article on this, but here’s the basic concept of the stock market — it is basically a giant auction house for people to buy and sell parts of companies. The price is set by the number of people willing to pay a certain price (“bid”), versus the number of people who own that stock and are willing to buy at a certain price (“ask”). A stock’s value is the last trade that was made between a buyer and seller.
While stocks like Tesla have a lot of trades, other companies may have far fewer. I used to have a stake in Crown Crafts, Inc (CRWS), a relatively small company — market cap of $50 million. In an average day, fewer than 20,000 shares are traded, so taking or selling a position of 1,000 shares can have a material impact on the stock price, and you often see material differences between the buy and ask prices. As I type this, it’s a difference of 7 cents, but I’ve seen it higher than 50 cents, which represents a 10% premium on the stock itself.
Remember that share price is dependent on the value that people see in a company, so while 1000 shares in Tesla is worth over $800,000 as I write this, a 1000 share position in CRWS would cost you less than $5,000 to initiate right now.
To be clear, I am not advocating investing in CRWS by any means. Trading smaller companies is significantly more complex, as with fewer buyers and sellers, taking even small positions can lead to big swings in the stock unless you’re using limits. I no longer have a position in CRWS myself.
Tesla averages more than 18 million shares traded each day, so it is much more likely that the bid and ask prices will not diverge much if at all, and with such volume, unless huge positions are being taken, they don’t usually result in wild swings just due to purchasing.
Whether it is CRWS or TSLA or any other company, share prices change if buyers purchase all the shares available at a certain price, driving the price up, or if sellers want to sell their shares and are willing to undercut other prices to sell quicker.
Ultimately, a company’s stock value is just the opinion of those willing to invest in it.
Prices May Seem To Not Make Sense
If you’re looking for beef to make burgers with, you probably aren’t bidding $155,000 for this cow at the Texas State Fair. You could literally buy a herd of cows for that cost.
That doesn’t mean that the person paying $150,000 is getting a bad deal, just that you don’t agree with that cost for the value you would get from it — but all you need in the case of an auction with a single thing being auctioned is one person to feel the price is worth that much. With a single item, other factors like the publicity that comes from the purchase, or the scholarship fund it supports, move the price point in.
It does not mean every cow is now worth $150,000.
The stock market is different because all of the shares are the same, so lots of people get to set what it is. A single opinion rarely changes the stock price, unless it’s an opinion that people think has particular insights.
Tesla stock price is too high imo
— Elon Musk (@elonmusk) May 1, 2020
Even in those cases, it is shifting opinions that set the price, and therefore the value of the company. Tesla has just over 185 million shares outstanding. Multiply those shares outstanding by the current stock price and you get the company’s market capitalization or total value.
In Tesla’s case, it takes a lot of opinions to get to the stock price.
What Tesla’s Share Price Tells Us
If you look at Tesla’s share price based on so-called “traditional” metrics, the opinions of many analysts — and short sellers — is correct! Tesla’s market value is significantly higher than the market values of those automakers.
But that’s the thing — the majority of shareholders do not believe that the traditional metrics should apply here. If they did, the stock price would be far lower. Knowing that, here are some conclusions I think Tesla’s current share price is telling us:
- Investors currently have a lot of faith in Tesla’s future business propositions.
- Investors believe Tesla has a competitive advantage against other companies.
- Investors trust Tesla’s mission and leadership.
- Investors believe Tesla’s current level of production should have a significant premium above other automakers.
If you look at another share price, like Ford’s, and its movements over the past month or so, that share price is telling us:
- Investors do not have a lot of faith in Ford’s future business propositions.
- Investors believe Ford does not have a competitive advantage (and may have a disadvantage) against other companies.
- Investors do have as much trust in Ford’s mission and leadership.
- Investors believe Ford’s current level of production is worth less than that of other automakers.
While there has been a lot of bad news about climate change, banks funding fossil fuels, and so on — one of the true positive signs that I see is that significant premiums are being put on the innovative companies of the future, and huge discounts are being put on the companies whose products cause it.
The values of coal companies have been pounded for years. Oil and gas, which represented 15% of the S&P 500’s value just 10 years ago, today represents just 3% of its value. This isn’t happening because we’re not using coal or oil. This is happening because in the opinions of investors, investing in these industries is a losing proposition. Instead, it appears investors have formed the opinion that the future is clean technology, and Tesla is one of the poster children.
It’s true! Everything I write about Tesla’s stock price is my opinion. And, for the record, I never tried to hide this — read the disclaimer! If you’re an investor who reads an article, you should be weighing that article’s opinion with the facts presented to form it versus other articles with varying opinions, and then determining if your opinion on the stock price makes it worth investing in or not. In hindsight, certain analysts will look more correct than others, but it’s impossible to know the validity of an opinion in the moment.
The stock market provides no guarantees. Unexpected matters can change the opinions of hundreds of people quickly in unforeseen ways. COVID-19’s impact on the travel and leisure industry is a great example. At the same time, the opinions of investors can often shed light into where companies, and even industries, are headed … or at least the opinions of where they are headed.
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.
Top photo by Zach Shahan/CleanTechnica