Tesla: Anatomy of a Run-Up

Abstract

This article presents a detailed anatomy of the nearly seven-fold run-up in the price of Tesla stock between March 22, 2013 and February 26, 2014, and attempts 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 populated by established competitors. This makes it possible to construct discounted cash flow valuation models that are anchored to 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, the authors conclude that the run-up cannot be explained as a rational reaction to fundamental information. Instead, they conclude that, at the end of the run-up, the stock was overvalued by approximately 150%. In their view, the case study provides support for the assertion by Lawrence Summers that price and rational value can diverge significantly for prolonged periods of time.