Many companies featured on Money advertise with us. Opinions are our own, but compensation and
in-depth research determine where and how companies may appear. Learn more about how we make money.

Advertiser Disclosure

The purpose of this disclosure is to explain how we make money without charging you for our content.

Our mission is to help people at any stage of life make smart financial decisions through research, reporting, reviews, recommendations, and tools.

Earning your trust is essential to our success, and we believe transparency is critical to creating that trust. To that end, you should know that many or all of the companies featured here are partners who advertise with us.

Our content is free because our partners pay us a referral fee if you click on links or call any of the phone numbers on our site. If you choose to interact with the content on our site, we will likely receive compensation. If you don't, we will not be compensated. Ultimately the choice is yours.

Opinions are our own and our editors and staff writers are instructed to maintain editorial integrity, but compensation along with in-depth research will determine where, how, and in what order they appear on the page.

To find out more about our editorial process and how we make money, click here.

By Chris Taylor
September 3, 2020
Getty Images

Say “bubble” these days, and you might think of the NBA playoffs, with isolated basketball players staying safe in a global pandemic.

But in stock-market terms, bubbles refer to companies or sectors or asset classes that just keep on inflating – to the point where the dreaded ‘pop’ might bring it all to an end.

Any company with a meteoric rise is drawn into a bubble debate: Is the share price justified, or has it become detached from reality? In 2020, one of those breakout firms is electric carmaker Tesla.

Elon Musk’s baby has had a nearly five-fold increase in 2020, vaulting him past Facebook’s Mark Zuckerberg to become the world’s third-richest person, behind only Jeff Bezos and Bill Gates. Its market cap briefly soared over $400 billion, making it by far the world’s most valuable automaker. (The stock was down about 7% on Thursday amid a market-wide selloff).

Ads by Money. We may be compensated when you click on this ad.Ad
To properly manage your portfolio, Online Stockbrokers can lend you their expertise.
Stash and their team of Online Stockbrokers offer affordable help for priceless peace of mind. Get the right pro to handle your portfolio today. Click on your state for more information.
HawaiiAlaskaFloridaSouth CarolinaGeorgiaAlabamaNorth CarolinaTennesseeRIRhode IslandCTConnecticutMAMassachusettsMaineNHNew HampshireVTVermontNew YorkNJNew JerseyDEDelawareMDMarylandWest VirginiaOhioMichiganArizonaNevadaUtahColoradoNew MexicoSouth DakotaIowaIndianaIllinoisMinnesotaWisconsinMissouriLouisianaVirginiaDCWashington DCIdahoCaliforniaNorth DakotaWashingtonOregonMontanaWyomingNebraskaKansasOklahomaPennsylvaniaKentuckyMississippiArkansasTexas
Start Investing Today

So is this a bubble we’re witnessing, or not? “Not yet, but it’s getting there,” says Joe Osha, equity research analyst for JMP Securities, who currently has a “Market Perform” rating on the stock. “If you think this company can generate $100 billion in sales in a couple of years, then it’s probably worth $400 billion. That’s not insane.”

But perhaps it’s time for investors to take a breath, especially since Tesla itself just announced plans for a share sale of up to $5 billion in a recent SEC filing. The selloff is to “strengthen our balance sheet, as well as for general corporate purposes,” the company disclosed.

In personal-finance terms, it’s a smart move for Tesla. With the share price so lofty – although the recent 5-for-1 split has tweaked the math – Tesla can raise a ton of cash to clear debt, expand capacity, or invest in R&D, while only giving up around 1% of the company. If “selling high” is always the goal, the firm is doing exactly that by taking some chips off the table.

In fact, JMP’s Osha thinks they should do even more. “It ought to be $20 billion,” he says. “They should take advantage of this extraordinary market cap to position themselves for the future. They could put so much money on their balance sheet that they become almost unbeatable.”

As a new retail investor, though, the move might give you pause. It’s essentially the opposite of a stock buyback, in which firms demonstrate confidence in their own prospects by snapping up their own shares.

Indeed, you have to wonder about further upside potential for Tesla after such an amazing run. Many analysts are concerned that the price has floated away from balance-sheet fundamentals: Goldman Sachs has stuck to its “neutral” rating and target of $295, suggesting that a further price drop could be in the offing.

Is Tesla a really a tech, energy or auto company?

Of course, the tricky part is how to value such a disruptive company. Is it an automaker, that should be valued against its peers in that space? Is it a next-generation energy company? Or a technology concern, that should be properly compared to Big Tech valuations? Or, perhaps most accurately, a unique blend of all of those elements?

The challenging thing about bubbles is that they are typically identified in retrospect. When you are in the middle of it, visibility isn’t as clear. Amazon, for instance, has been accused of bubble-like valuations many times over the course of its existence, and yet powers to new highs as the “Everything Store” keeps taking over global retail – including a 90% rise in 2020 alone.

For help in identifying what is a bubble and what isn’t, we turned to one of the foremost experts on the subject: William Quinn, a lecturer at Queen’s University Belfast and co-author of “Boom and Bust: A Global History of Financial Bubbles”.

“It’s uncontroversial to say that Tesla’s share price is very high by traditional metrics,” he says. “The company has an exciting and compelling narrative associated with it, and tends to attract shareholders who haven’t invested before, both of which are common features of a bubble.

“The fact that its share price has continued to rise for several years, despite the skepticism of most professional investors, feeds the narrative that it’s a fundamentally unique company to which the old investment rules don’t apply. Again, this is a recurring feature in historical bubbles.”

The recent stock split may play into that dynamic, making it more affordable to mom-and-pop investors who love Elon Musk’s seemingly magic touch. Throw in other positive trends — like a pandemic-inspired market tilt towards technology, and potential inclusion in the S&P 500, which would necessitate a large round of buying from index funds – and you have plenty of tailwinds pushing the company forward.

Just remember that if you do decide to invest in coming months, it could be the company itself on the other side of that trade.

“It builds the best electric cars, and not by a little,” says Osha. “So it should continue to prove to be a good long-term investment. But I suspect that at some point, you should be able to buy it cheaper.”

Ads by Money. We may be compensated when you click on this ad.Ad
If you want to see your money grow by investing, you need a capable stockbroker.
Online Stockbrokers will guide you with their vast knowledge, so you can wisely invest your hard-earned dollars. Don't give it a second thought and click below today.
Get Started

More from MONEY:

Apple and Tesla Are Taking Off (Again) After Stock Splits

High-Yield Savings Rates Have Tanked, but These Overlooked Accounts Still Pay 2% or More

Congratulations! You Won Big Betting on Tech Stocks. Now Start Selling Them

Advertiser Disclosure

The purpose of this disclosure is to explain how we make money without charging you for our content.

Our mission is to help people at any stage of life make smart financial decisions through research, reporting, reviews, recommendations, and tools.

Earning your trust is essential to our success, and we believe transparency is critical to creating that trust. To that end, you should know that many or all of the companies featured here are partners who advertise with us.

Our content is free because our partners pay us a referral fee if you click on links or call any of the phone numbers on our site. If you choose to interact with the content on our site, we will likely receive compensation. If you don't, we will not be compensated. Ultimately the choice is yours.

Opinions are our own and our editors and staff writers are instructed to maintain editorial integrity, but compensation along with in-depth research will determine where, how, and in what order they appear on the page.

To find out more about our editorial process and how we make money, click here.

EDIT POST