Making Sense of Tesla's Run-up

Abstract

Tesla has run-up again. Between December 2, 2019 and April 30, 2021, the price of Tesla rose more than ten times creating over $600 billion in investor wealth. The analysis presented here implies that the 10x jump cannot be explained by the arrival of fundamental information regarding the macroeconomy, the auto industry, or company specific information related to Tesla as an electric vehicle manufacturer. The only feasible explanation for the run-up was a spreading narrative that Tesla is more than a car company. As stated by Mr. Musk, and echoed by Cathie Wood and others, Tesla is also going to be a renewable energy, artificial intelligence, ride sharing, and robotics company. Such narratives have the advantage that they can blossom and replicate with little in the way of capital expenditure and improvements in operations both of which tend to have a sluggish impact on value. They also benefit from a feedback effect by which spread of the narrative drives up the stock price and the rising stock price is then interpreted as evidence for the veracity of the narrative. Of course, the spread of a narrative and the feedback effect can operate in both directions. A narrative that arises, spreads, and drives stock prices to new highs can collapse just as quickly.