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What drove the recent price increase of Tesla Inc shares?


Elon Musk is now officially the richest in the world. With his net worth crossing $186bn he surpassed the previous leader Jeff Bezos, founder of Amazon. All this wealth is of course mostly driven by Musk’s large stake in Tesla Inc. The equity of the company saw a sharp increase (almost 8x!) in market value this year, making it worth nearly as much as the nine largest car manufacturers in the world. What were the most important causes of this growth?


Firstly, there were some relatively straightforward events that had investors excited last year. Profitability was increased by more than doubling emission credit sales year-over-year and by increasing pricing of a full self-driving option with nearly 50%. As a result, gross margins from car sales increased from 20.6% to 26.4% (Q1-Q3). More good news was the completion of a large factory in Shanghai. China is a big market for car manufacturers, and having a large production facility in the country is considered to be a great opportunity for Tesla.


Another cause for the increase in market value was the fact that investors noticed Tesla was starting to deliver on predictions made by Elon Musk years ago. For example, in 2014, he promised his company would deliver 500k vehicles in 2020. At the end of 2020, it was indeed estimated that Tesla would deliver this many cars. For many people, this is proof that Musk is a genius leader which can be nothing but good for his company. Skeptics try to remind them of the fact that Elon Musk has made many more predictions in the past that did not turn out as he expected them to do. Take the previous example of 500k vehicles. In 2016, 2 years after the initial prediction, Musk moved up this prediction to happen two years earlier, in 2018, which of course turned out not to be true. This goes to show that predictions are always hard to make and should not be given too much weight. These reminders mostly fall on deaf ears however, Tesla investors being the loyal investors that they are.


Finally, many investors argue that Tesla is more than just a car company. In its early days, it was mostly conceived as a car manufacturer with a spin. At the time, the general opinion was that cars could not be electric and cool at the same time. As the popularity of the cars eventually picked up, Tesla was forced to develop charging networks and good batteries and saw itself competing with businesses in totally different industries. Tesla went beyond what traditional car manufacturers were doing and thus began being called “more than a car company”. While this seems to be a fair argument, in my opinion it is a bit extreme to calculate the future values of activities in these other industries, which will take a long time to yield sizable returns, into today’s price. Has Tesla already figured out how to become a dominant player in these other industries? Probably not. However, if we have to believe the mantra “the market is always right”, maybe it all isn’t so extreme after all. Elon Musk certainly doesn’t mind.


If you enjoyed this article, you will surely enjoy this year’s Winter Magazine. In the magazine, Jean Holleman discusses some factors that have led to the massive IPO valuations we saw last year. Some companies he discusses in his piece include Airbnb and Snowflake. Stay tuned for that!


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