1. Money

    Matthew Lynn

    When will the Tesla bubble burst?

    Is each of the firm's cars really worth a million dollars?

    When will the Tesla bubble burst?
    Tesla boss Elon Musk (Getty images)
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    How much would you pay to park a shiny new Tesla on the driveway? Perhaps fifty thousand pounds? Or seventy thousand? If you were looking at a top-of-the range Model X, which retails in the UK at £81,000, but allows you to look down smugly on all the gas-guzzling SUVs also clogging up the streets of Chelsea, perhaps ninety or a hundred thousand? 

    Well, here is an odd fact: the stock market is valuing each of those cars at more than a million dollars (£750,000). This is surely the clearest sign yet that the company’s extravagant valuation has reached bubble territory.

    Earlier this week, the electric vehicle manufacturer announced blockbuster delivery figures. Tesla sold 308,600 cars in the final quarter of 2021, far more than the 263,000 the Wall Street analysts who follow the company were expecting. Amid supply bottlenecks, a chip shortage (hardly a minor matter, as anyone who has ever looked at the circuitry packed into every Tesla will testify) and, of course, the pandemic that was a considerable achievement. Perhaps most significantly, it reassured investors that Tesla could ramp up production to meet soaring demand and perhaps even eventually catch the numbers achieved by the volume manufacturers such as Volkswagen and Toyota.

    Even so, the reaction of the share price was extraordinary. Tesla stock was up almost ten per cent on the news, hitting fresh all time highs. In a single session, the company added $140 billion (£100 billion) to its market value, more than the entire value of VV (which, incidentally, manufactures almost nine million cars a year across its range of brands).

    Does the absurd stock market valuation of Tesla make any sense? Sure, it is a great company, which has turned its industry upside down and pioneered a new technology. Yes, it makes some impressive vehicles. No one would deny that. But, still, a million dollars per sale? 

    Presumably Tesla could simply buy your new Model 3 (list price in the UK £42,500) off you for £50,000, put it back in the showroom, re-sell it at list price, and (even if it took a small hit on cashflow) it would add another $1 million to its value. Sustainable? Not really. In truth, the stock market has been in this kind of bubble territory lots of times before. Tesla may well be an excellent business, but it's $1 trillion (£750 billion) market value is crazy. A sharp correction looks inevitable at some stage. Indeed, Elon Musk himself may say he has been selling shares – $16 billion (£11 billion) of them in the last few months – because Twitter polling said he should. But he may realise the valuation has long since lost contact with reality.

    Written byMatthew Lynn

    Matthew Lynn is a financial columnist and author of ‘Bust: Greece, The Euro and The Sovereign Debt Crisis’ and ‘The Long Depression: The Slump of 2008 to 2031’

    Topics in this articleEconomyMoney