Tesla: Anatomy of a Run-Up Value Creation or Investor Sentiment?

Abstract

This paper presents a detailed anatomy of the nearly sevenfold run-up in the price of Tesla stock between March 22, 2013 and February 26, 2014 with the goal of attempting to determine the role played by investor sentiment. Tesla offers a unique opportunity in this context because the run-up was on the order of magnitude experienced by some of the most volatile technology stocks, but Tesla operates in an industry, automotive manufacturing, and a potential industry, battery construction, that are mature and are populated by established competitors. This makes it possible to construct discounted cash flow valuation models that are anchored on established fundamentals. On the basis of these models, in conjunction with a detailed event study and analysis of institutional stock holdings and short sales data, we conclude that the run-up cannot be explained as a rational reaction to fundamental information. Instead, we conclude that at the end of the run-up the stock was overvalued by approximately 150 percent. In our view, the case study provides support for Summers assertion the price and rational value can diverge significantly for prolonged periods of time.

Keywords: Valuation, Investor Sentiment, Asset Pricing

JEL Classification: G12, G14