Stock markets may have regressed from their recent highs, but there has been no way to stop Tesla’s advance. Shares of the electric car company hit an intraday high of more than $ 1,790 this week, valuing it at a record $ 320 billion, more than Toyota and Volkswagen combined. Tesla’s rise since the beginning of the year, its shares have almost tripled, has even surprised Elon Musk, its CEO. “Wow” was his response earlier this week after a Wall Street analyst predicted that stocks could rise further.
Tesla’s remarkable career shows many signs of being a stock bubble. Shares of General Motors, which has its own electric vehicles, are trading at less than 10 times earnings. Based on first-quarter earnings per share of $ 1.24, Tesla is trading at more than 1,200 times earnings. When bubbles burst, investors get hurt, but there is often something worth leaving behind.
The dot-com boom of the late 1990s was fueled by hopes for the digital revolution, even if a large number of startups broke down. Choosing winners in the middle of a bubble is not easy. Amazon went through the irrational exuberance of the dot-com era, but betting on what started as an online bookstore was far from safe at the time.
Financial bubbles can drive innovation by mobilizing capital toward technological advancements. In the case of Tesla, investors are betting that electric cars are here to stay. Nio in China and Nikola, a new American fuel cell trucking company, have also seen big spikes in their actions in recent weeks. In Nikola’s case, the company outperformed Hyundai and Fiat Chrysler within days of listing their shares. It makes no profit and you still have to sell a single vehicle.
The above financial bubbles give similar lessons. Britain’s Railway Mania, which started in the 1830s, brought financial pain to many sponsors when the trial came, including Charles Darwin and the Bronte sisters. The same was true of the US rail market by the turn of the century. But both bubbles stimulated investment in vital infrastructure. They laid the foundations for the railway network that would form the backbone of transport systems and the industrial growth of the countries. Similarly, the excitement surrounding American telecommunications in the 1990s spurred investment in vast fiber optic networks, telecommunications infrastructure that survived even after many operators had sunk.
In the case of Tesla and other pioneers of electric vehicles, the jury does not know whether they will survive the planet’s push for a green economy. Not everything has gone well for Tesla. Concerns have been raised about the safety of his batteries, while Musk’s decision to open his California factory in defiance of local orders due to the coronavirus pandemic caused anxiety among workers. However, he deserves credit for building a pure electric car company from scratch. The support of its investors has enabled it to move forward with some key electronic vehicle technologies and, perhaps most importantly, made the idea of electric vehicles great.
Tesla can be surpassed by another pioneer or even one of the most established players in the automotive industry. Such an outcome may not please many of the young and hopeful investors who have helped drive Tesla’s stock price to record levels in recent months. But economies evolve through experimentation. Whichever company inherits the electric future, the next generation will appreciate the innovation that has been fostered in the process.
