11/3/2021 11:00:00 PM

Market Watch Episode 60: What's driving Tesla's trillion-dollar valuation?

Led by controversial billionaire Elon Musk, electric car company Tesla is never far from the headlines.

But when its valuation topped US$1 trillion last week even professional market watchers had to pinch themselves.

The company is now worth six times more than it was pre-pandemic. Its value surged 44 per cent through October.

It's been "a bit like watching a Tesla accelerate from nought to 100", said Pie Funds chief executive Mike Taylor.

"For a company of that size to rally that much in one month, it's almost unheard of."

Tesla had been swept up in another "euphoric" US investor surge, he said.

"I think that retail investor sentiment is very buoyant at the moment, so we've seen bitcoin rolling back to new highs and some of the big tech names."

There was one piece of fundamental news that may have been a trigger, he said.

"One of the rental car companies in the States announced they were going to buy 100,000 Teslas next year and that's roughly about 10 per cent of what they produce, so it's quite significant.”

But the valuation was highly speculative based on its current position in the market, Taylor said.

For example, Toyota's market cap is US$245 billion.

"So last year the world produced 78 million cars and Toyota has an 8 per cent share of that."

Tesla was producing around 1 million cars a year and represented less than 2 per cent of the market.

"For US$1.7 trillion you could buy all the other car companies in the world," he said.

Tesla did look set to be one of the biggest electric vehicle players in the future, he said.

But its rivals and traditional car companies weren't standing still and were catching up on the technology front.

"I think it would be a very optimistic investor that would assume that Tesla might pick up 20 per cent of all global car sales," he said.

"I think that people should be very cautious at the moment. It has gone up a lot in a very short space of time, and in these types of instances there's often quite vicious pullbacks in the price, so I would definitely urge caution."

However, there were a few things investors could look for to identify what makes these kind of tech stocks perform so well, he said.

"Does the company have a product that can capture the imagination of investors? I think that's the case with Tesla."

It was also important to consider whether it was a revolutionary new technology, he said.

"The third point would be, can you get mass participation by all investors, so not just institutional but retail investors. We've definitely got that with Tesla.

"The last point, I would say, is that is there a sort of really charismatic founder, leader of the company as we've gotten with Elon Musk."

Taylor owns a Tesla car but (by way of disclosure) notes that Pie Funds does not hold any stock.

- The Market Watch video series is produced in association with Pie Funds. View the original article here.

Information is current as at 4 November 2021. Pie Funds Management Limited is the manager of the funds in the Pie Funds Management Scheme. Any advice is given by Pie Funds Management Limited and is general only. Our advice relates only to the specific financial products mentioned and does not account?for personal circumstances or financial goals. Please see a financial adviser for tailored advice.?You may have to pay product or other fees, like brokerage, if you act on any advice.?As manager of the Pie Funds Management Scheme investment fundswe receive fees determined by your balance and we benefit financially if you invest in our products.?We manage this conflict of interest via an internal?compliance framework designed?to help us meet our duties to you.?For information about how we can help you, our duties and complaint process and how disputes can be resolved, or to see our product disclosure statement, please visit www.piefunds.co.nzPlease let us know if you would like a hard copy of this disclosure information.