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crazyguy's avatar

What is your guess of Tesla's market cap on Dec 21?

Asked by crazyguy (2014points) 1 month ago

For those of you who do not live and breathe TSLA every waking minute, here is a summary of what is going on. In the lead-up to their Q3 earnings, a huge deal was made of TSLA qualifying for the S&P 500 if they could somehow show a profit.

Well, lo and behold, TSLA showed a profit of 76 cents per share. That qualified TSLA for inclusion in the S&P 500. On Sep 8, the S&P 500 committee that determines which 500 companies make up the index, decided to not invite TSLA. That inaction sent the stock plunging about 20%, down to $330 on the same day!

The committee decided in their November meeting to include TSLA. Since then, the stock has been on a tear. Since the announcement was made on Nov 16, TSLA stock has gone up by $177 from $408 up to $585; in percentage terms the gain is over 40%. Tesla’s market cap, which is simply the product of issued shares times the stock price, has exploded from under $400 billion to over $550 billion. It is now worth more than all the other automakers combined!

Of course, TSLA has other reasons for its stock to be on a tear. Demand for its products is extremely high among the movers and shakers, and is gradually reaching Main Street. Competition is gearing up, as you would expect. However, the competition has so far not been able to dent Tesla’s massive lead in EV technology.

In case you are wondering why S&P500 inclusion is such a big deal, keep in mind the number of mutual funds and Exchange Traded Funds (ETFs) that attempt to mirror the S&P500. The way these funds mirror the S&P 500 is to basically own the same stocks in the same ratios as the index. So until a stock is actually added to an index, the index funds do not own any of it. By the date the stock is added, they are required to hold enough of it to not have it affect the index fund’s performance. In the case of TSLA, because of its substantial market cap even before the announcement, the committee decided to give the funds plenty of time. The actual date of inclusion was set at Dec 21. Therefore, index funds, which control $11.2 trillion, are required to purchase TSLA between the announcement and Dec 21. The amount they are required to invest in TSLA is a moving target because every time the TSLA market cap goes up, its share of the index goes up. Currently, its share is estimated at 1.5%. Therefore, about $150 billion is required to be invested in TSLA stock by Dec 21.

So, now that you are an expert on the stock market, my question is: How high will the TSLA market cap go by Dec 21?

Just by way of comparison, Apple is the largest company by market cap. Apple’s market cap is a shade below $2 trillion. You can see the top 50 at

https://www.dogsofthedow.com/largest-companies-by-market-cap.htm

Remember no expertise is required. In fact, my experience with TSLA has been that expert opinion has been consistently wrong.

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19 Answers

AYKM's avatar

My guess is it’ll perform well. .

Response moderated (Unhelpful)
zenvelo's avatar

The December 21 date is not that meaningful, because most of the index trackers have already added TSLA to their portfolios.

The recent movement in TSLA is not all attributed to the S&P 500 inclusion; the whole market has been on a tear, factoring in the Biden win and also the vaccine development.

My estimate for where the stock will close on December 21 is $791. giving TSLA a market capitalization of $750 Billion.

crazyguy's avatar

@zenvelo Thanks for a good answer. You said: “most of the index trackers have already added TSLA to their portfolios.” I think you are absolutely correct. There have been 8 trading days since Nov 16. Trading volume over those 8 days has totaled over 400 million shares. In the 8 days before the announcement, including Nov 17, the total trading volume was just under 200 million. The difference of 200 million shares accounts for over $100 billion of stock. Considering the fact that only $150 billion needs to be added, I think your statement is a fair summary.

However, don’t forget all the mutual funds that use the S&P500 as a benchmark, in other words, their prospectuses compare the fund’s performance to that of the S&P500. Such funds are called “active” funds (versus “passive” funds) since the fund managers decide which stocks to hold and in what quantity. In 2019, the Assets Under Management (AUM) at Passive funds went beyond AUM at Active funds for the first time. Also, not all active funds benchmark against the S&P 500. Since I have not been able to find a figure for AUM at S&P500 benchmark funds, we are going to assume that active funds have AUM of 75% of AUM in passive funds. And we are going to assume that only 50% of these benchmark against the S&P500. That gives us

AUM = .5 * .75 * $11.2 trillion = $4 trillion.

If these funds buy TSLA in the same proportion as TSLA’s contribution to the S&P 500 (i.e 1.5%) they would have to buy $60 billion. However, these funds are not required to own any TSLA, they have 100% control over why stocks they add to their portfolio. So, if a fund manager thinks TSLA will underperform the S&P500, and thereby hurt the fund’s performance, the fund may not own any TSLA. Conversely, some funds may be overweight in TSLA. Also, there is no timing requirement. Typically such active funds indulge in “window dressing”, i.e. they buy up top performers just before a quarter ending or year ending trading day. BUT, assuming that these funds will end up on Dec 31 owning their pro rata share of TSLA stock will create a further demand of $60 billion, i.e. 100 million shares at an SP (stock price of $600). 100 million shares is not significant given the fact that TSLA trades over 30 million shares per day. However, the extra demand over and above the normal demand will probably act as a catalyst for price growth beyond Dec 21.

As you can see, this is a subject that can be studied ad nauseum, and still yield just possibilities.

gorillapaws's avatar

I was always bullish on TSLA, but I never foresaw the absolute explosion in share price that happened. I cashed out before it went ballistic. The concern that I have for Tesla is a macroeconomic one. I fear that the fallout from COVID’s impact on the economy—the actual economy (homelessness, unemployment, consumer debt, median wages, etc.) not the S&P valuation—will eventually catch up to share prices.

I have no idea when that’s going to happen, but I think it’s going to be sudden, and brutal. Companies like Tesla with 90x PE ratios will get smacked…hard. I believe in the company; I love their products, and I think they will be successful long-term. That said, I think they are overdue for a share-price correction. Also I doubled my investment and cashed out in about 6 months…right before the stock when ballistic, so take my opinion with the appropriate degree of skepticism.

crazyguy's avatar

@gorillapaws Thanks for your answer. My portfolio has had its share of winners cashed out too early, so I fully understand why you did what you did.

My analysis of TSLA has, however, been spot-on. I think TSLA will avoid the pitfalls of past winners at least until the 6-month average trailing market cap hits $650 billion (that is the level for the final incentive payout for Musk). However, I think, by then Musk’s compensation package will have been deservedly sweetened. In terms of demand for Tesla’s cars and batteries, there has not been any softening yet, and I expect the pickup truck and the semi will continue the trend. So I fully expect TSLA to hit $1 Trillion and possibly more.

zenvelo's avatar

^^^Except the truck segment has some fierce competition ahead from Nikolai (NKLA) (Although NKLA is down 25% today because of a deal with GM falling apart.)

crazyguy's avatar

@zenvelo And TSLA has had no competition yet in sedans and SUVs?

zenvelo's avatar

@crazyguy NKLA is way ahead of TSLA towards getting things to market, especially commercial trucks.

Elon likes to make a premature splash, like he did with his pick up prototype,but even when he showed that off TSLA folks were saying it was a long way from production.

Smashley's avatar

I’ve got a similar take to the gorilla. The stock market is frothy as f, mostly because it seems to be the only place for investors to make decent returns these days, and the explosion in popularity of trading in general. I don’t gamble in this manner, so I don’t have the nuance you guys do, but I do see trends like poverty and autonomous vehicles severely limiting demand in the future.

crazyguy's avatar

@Smashley I agree the market has been frothy as fuck (I believe Fluther lets you say it!).

Notice I requested your estimate of Tesla’s market cap on Dec 21 (the day it joins the S&P 500). not years from now. I agree its funday’s,metals are nowhere near supporting its market cap; however, earnings have the potential to explode in coming years. Hence the lofty stock price.

Smashley's avatar

@crazyguy – fair enough. Guess I was answering the question I wanted to, instead of the one you asked.

Lets go withhhhhhh $751B, Drew.

crazyguy's avatar

@Smashley If it goes that high, which implies about a 25% increase from yesterday’s valuation, I may have to part with some of my shares, because I sold calls with a strike price of about 22% over the current price. I would not mind that at all!

zenvelo's avatar

@Smashley this isn’t the Price is right, you don’t have to go 1 billion more than me….

crazyguy's avatar

@zenvelo My intent in posing my question (which could have been better asked) was to get people thinking about the possible opportunity in TSLA shares, not to set off wild-ass guesses. I apologize for the lack of precision in my question.

Smashley's avatar

@zenvelo – just being cheeky, let’s just say I think you’re probably pretty close.

crazyguy's avatar

@zenvelo @Smashley I hope you are both correct. It will be awesome for my portfolio!

crazyguy's avatar

All, this is D-Day! TSLA volume is over 26 million shares, and we have not finished the first hour yet.

With over 1.1 billion shares outstanding, TSLA market cap is approaching $700 billion. Truly amazing!

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