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An Electrifying Bubble Waiting to Burst?

February 22, 2021

If you don’t think there’s a bubble brewing in the stock market, look no further than Tesla.

The electric car maker’s stock opened 2020’s first trading day at a split-adjusted $89.40 per share. It closed on the last trading day of 2020 at $705.67 per share, an eight-fold increase. At the time, the company had yet to log a profitable year, and only recently did so.

It’s as if the stock market were predicting a quick end to the internal combustion engine and a mandate for everyone to drive electric vehicles, specifically a Tesla.

How else can you explain why Tesla’s market capitalization (around $830 billion) is currently greater than the world’s next 10 most valuable automotive companies combined? That means Telsa is more valuable than all of Toyota, Volkswagen, Daimler, GM, BMW, Hyundai, Ferrari, Honda, Fiat, and Ford. The total market cap of those 10 companies is $737 billion.

Do investors really believe there will soon be more Tesla models on the road than all those other companies put together?

Toyota alone sold 17 times more cars through November 2020 than Tesla did all year. Also, Tesla lost $862 million last year while Toyota made $13 billion. Toyota’s stock trades for 9 times earnings and pays a dividend yield of 2.7 percent, which is more than 2.5 times the current yield on the 10-year Treasury note.

Yet, the valuations are what they are.

This is the kind of wild, speculative, behavior you see at the end of a bull market.

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