My polite term for Tesla's valuation right now is "insane."
This is a company worth more than $550 billion. That's not only a staggering sum--making it the biggest American company other than the tech giants--but it's up from less than $80 billion at the start of the year.
That's right--Tesla's 580% rally just this year has pushed its market cap from less than $80 billion to over $550 billion. The stock price has gone from less than $90 (recall it did a five-for-one split, so at the time that was around $450) to almost $600 today--meaning, nearly $3,000 if it hadn't split. It's absolutely wild.
Now, stocks take off like this all the time--but usually, they're smaller speculative plays. The cannabis stocks in 2018, for instance. Crypto plays the previous year. Beyond Meat last summer. So when the hype cycle ends and the stocks come back down to earth (although BYND has held up admirably well), the only people burned are the investors who rushed in at the highs.
Tesla is a different story. Not only is it so much bigger than the typical speculative name, but its recent rally has ironically been predicated on the fact that it's about to be added to the S&P 500 for the first time. Which means that every single one of you reading this who own a passive S&P ETF or mutual fund--and my guess is, if you include retirement plans, that's basically all of you (and me!)--is about to buy Tesla at this eye-watering valuation.
This puts the S&P index committee in an awkward place. As the Wall Street Journal detailed over the weekend, they even polled investors on whether to add Tesla shares all at once on December 21, or over the span of two trading days or even two quarters, as was the case when MSCI added China to its emerging market index a few years ago. Why? Because S&P-linked funds are the most popular investing instrument on earth, with at least $4.5 trillion tracking these 500 stocks. And since they are "passive," the fund managers can't say nah, we'll skip on adding Tesla at these levels; they have to buy Tesla when it goes in and sell whichever name it's replacing.
Hence why Tesla shares are up 40% just since November 18th, when S&P announced its decision to include them. I'm sure the committee wishes they'd done it a year ago, but technically S&P is only supposed to include companies that have strung together four quarters of profits, a milestone Tesla only hit this summer. So now, Tesla is going in already as one of the most valuable companies on earth. It's like when an exciting Silicon Valley start-up (say, Uber) waits so long to go public that by the time it does, the sizzle is gone and it's become just another boring big company battling policymakers over industry rules.
Last night S&P announced that it will go ahead and add Tesla to the index all at once; the shares popped another 5% on that news. Great.
Maybe it will all turn out just fine; Amazon's done pretty well since it was added to the S&P in 2005, up 100-fold. Apple seemed like it was going into the Dow at its own highs in 2015, spurring a raft of "curse of the Dow" articles, and yet it's up 500% since then. I'm a big fan in general of passive index investing, but I just wonder if we've jumped the shark here. If you wouldn't buy Bitcoin just because "everyone else is buying it," do you really want to own Tesla right now for the same reason?
So for all you fund-peddlers out there, here's my suggestion for a new mutual fund or ETF: the SPXT--the S&P 500, ex-Tesla. At least give us skeptics someplace to put our money where our mouth is. We can all compare performance over the next one, two, five, ten, twenty years; and if the Tesla true believers are right, and these aren't the highs, they'll be laughing all the way to the bank.
See you tomorrow, if I can shake this cold!