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Tesla’s Share Price Broke Above $2,000 – How High Can It Go?

Posted: Sunday, August 23rd, 2020

Estimated Reading Time: 2 minutes

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Tesla’s share price closed last Friday above the $2,000 for the first time. It currently has a market valuation of almost $400 billion, making it the 12th largest company in the world.

However, it only sells $24.6 billion a year. Judging by this metric, Tesla’s share price looks overvalued. The company is in the 458th place in the world if we compare its revenues with other companies’ income stream.

Yet, investors keep bidding for its share price. It trades at 15 times price to sales ratio, at 1038 times price to earnings ratio, and so on.

With sky-high valuations, what drives investors to Tesla? Why keep adding Tesla to your portfolio if it does not make any sense if we use traditional financial analysis?

Tesla Share Price

S&P500 and Tesla’s Share Price

There are many reasons why investors keep pushing Tesla’s share price higher. One, for instance, comes from the Fed.

The Federal Reserve of the United States (Fed) reacted promptly to the coronavirus crisis. It quickly lowered the federal funds rate and restarted the quantitative easing program.

As a result, yields dropped, and investors were “forced” to look for higher yields in the stock market. The stock market bounced from the lows and even put new all-time highs in some cases (e.g., Nasdaq100).

Another thing to consider and this time is not only Tesla – fractional shares investing. Brokerage houses like Robinhood and others allow retail traders to trade fractions of a company’s shares. Effectively, if you want to buy $100 worth of Tesla, the broker will give you a fraction of the share, corresponding to the amount you want to invest. This way, retail traders had access to stocks that otherwise would not trade for lack of capital.

Tesla announced a 1:5 stock split recently, but it did not stop investors from bidding for its share price. Just the opposite – the recent break higher came after the split announcement.

Passive Investing

So what drives Tesla’s share price higher? Passive investing.

More precisely, investors buy the stock in anticipation of its inclusion in the S&P500 index. After Tesla’s Q2 2020 earnings, the company became eligible for the inclusion in the index, and passive investors must add it to their portfolios too.

In other words, if Tesla becomes part of the S&P500 index, passive investors that track the index’s composition will have to add it too. Hence, they must buy it to keep the portfolios unaltered.

Can Tesla’s share price move even higher? Traditional financial analysis tools do not matter anymore, as shorts got killed.

If the bull market continues, Tesla will still outperform.

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