Tesla Evaluation

Name: Chien-cheng, Wu

Course: FE442

Date: April 26th

Since the beginning of the year, the strongest U.S stock is Tesla Inc. In the past three months, Tesla Inc.’ stock price has increased dramatically by around 23%, which is from 252.51 USD to 310.68 USD. By contrast, during this period, S&P 500 index has only increased by around 4%. The market capitalization of Tesla has increased to 50.67 billion, which is more than Ford Motor Co. (46.47B) and just slightly lower than General Motors (52.49B). The public believes it will become the most valuable U.S automaker in the nearly future. However, in my opinion, Tesla shares are overvalued, despite the electric vehicle will drive the future but not yet reached this point.

Stock price, as a performance measure, represents business intrinsic value, investor expectation and news effects. The stock’s rise in this year is mostly based on the market’s expectation on the Tesla Model 3, the vehicle that CEO Elon Musk hopes can reach the goal of universal access to electric vehicle. It sounds to be an exciting industry revolution developed from technology. The critics highly comments Tesla as the new Apple and expects Tesla to disrupt the market like Apple did. However, from an objective point of view, the market may overact to news announcements and investors are not rational enough. The excessive expectation on Tesla blind the investors to the reality.

There are many competitors in the electric vehicle industry such as Chevrolet, Honda, Volvo. Many of them are going to release their own electric vehicles by 2020. However, they did not get attention as much as Tesla did. The public treats Tesla differently than other automakers because Tesla is classified as a high-tech company. This is the determinant that why Tesla is able to gets capital and brand loyalty quicker than the traditional automakers. For the Tesla, the market tends to pay less attention on its balance sheet but the company’ potentials. Even though Tesla didn't make any positive profits in the past few years, investors’ attitude is still optimistic. Furthermore, according to the Business Insider, it said the Tesla bubble just got terrifying. They gave us an explanation that the short sellers of Tesla have been suffering in the recent years and switching their positions, buying the shares. That’s why Tesla stock is going up. Many information has implied that the Tesla stock is overvalued.

In the study of Tesla, we can say our market is closer to the weak form of efficiency market. In this version of hypothesis, the technical analysis can’t be utilized to aid investors in making decisions. However, the fundamental analysis can help investor determine whether the stock is undervalued or overvalued. By looking at the case of Tesla, we can easily see that the technical analysis isn't effective. In their annual report, they cannot even make profits but the stock price is increasing dramatically no matter the performance of their report. By contrast, the fundamental analysis is quite effective in analyzing Tesla stock. The company’s estimate earning and potentials has been reflected in the stock price. Both of them fulfill the characteristics of the weak form of efficiency market.