Elon Musk became nearly $ 4 billion richer on Wednesday morning, probably before he even got out of bed. But why? Because Tuesday night Tesla (one-fifth owned by Musk) announced a “stock split” that in pre-market speculation early on Wednesday raised the company’s already stratospheric valuation by another 7%.
Yet a supply split is just a domestic arrangement. It is when a company divides the existing shares of its share into several new shares, usually because the share price has reached such high levels that even buying one share seems too expensive for small investors.
The total dollar value of a company should remain the same as compared to the pre-split amount. But logic left the Tesla share price long ago.
Tesla shares have risen from $ 229 a year ago to around $ 1500 in recent weeks. Feverish small investors (nearly half a million Americans point to Tesla on the commission-free trading app Robinhood alone) have even taken to buying fractions of one Tesla share to get into the party.
After splitting the stock, it will cost about $ 275 to buy a single share, as Tesla divides each share into five. Surely the thinking behind that 7% early rise was that more small traders could jump in, and with more demand, the share price would have to rise.
A 7% increase in Tesla’s share price translates into extraordinary numbers. The total valuation of the company is about $ 272bn. A 7% increase in its share price equals $ 19 billion, or more than the full present value of Fiat Chrysler, once one of the big three Detroit automakers.
Elon Musk owns about 20% of the company, worth about $ 55 billion. That 7% increase adds about $ 3.8 billion to his fortune.
Yet there has been no change to the company’s business, no launch of new cars, no new battery ahead. What drives Tesla is what brand retailers call “momentum” instead of foundations.
Tesla is obviously far from the first to make a stock split. Apple and Google did it when their stock prices went up, and it did not hurt shareholders. Any pundit who said that Tesla was seriously priced at $ 300 per share, if $ 500 per share, or $ 1000 per share is seriously proven wrong. Not only is it the number one manufacturer of electric cars, it sells the next three largest gears.
There are enough reasons to say that Tesla is a great company – that just does not confuse with the share price.
Even the Beirut explosion probably does not require clarity of corruption
Lebanon had a failed economy before the explosion that destroyed Beirut last week. Unless change happens quickly, it risks becoming a failed state, writes Larry Elliott.
Humanitarian aid is coming, but the needs of the country go far beyond that. Lebanon has 40% inflation and the economy is likely to contract with at least 25% this year. Renovating Beirut costs 5% and that is money that Lebanon simply does not have.
Clearly, what the country needs is a major rescue package from the International Monetary Fund, but the IMF is not allowed to lend to countries that do not have a chance to repay what they borrowed. Depreciating Lebanon from pre-existing debt would help, but it would not be enough.
Talks between Lebanon and the IMF over financial support have lasted months but have been halted. The IMF, as its Executive Director Kristalina Georgieva made clear after the explosion, fears that without stronger action to tackle corruption, any aid would be misappropriated or misapplied. Unfortunately, Georgieva is right about that.
The IMF’s plan for Lebanon looks reasonable enough: action to make public finances sustainable; capital controls to prevent money flowing out of the country; measures to cover the losses in state-owned enterprises that are riddled with corruption; and a stronger welfare network for the protection of the poor.
However, none of this will happen without the political will to establish effective institutions that are responsible, clean and trustworthy. There is a chance that public aversion to the incompetence and sleaziness of Lebanon’s ruling elite will be the catalyst for real change. It seems more likely that the explosion will lead to a power vacuum that other countries – Iran and Saudi Arabia, for example – will be envious of filling.
