Is Tesla a Bubble?

Purveyors of the Efficient Market Hypothesis have conceded that while market bubbles can and will occur, but it is nearly impossible to ordinary investors to capitalize on them by gaining out-sized returns. Their argument flows from an issue of market timing (knowing exactly when to get into/out of the bubble) and costs of such investments (it is very costly to fight the majority of the capital flows in the market). However, other investors who reject the Efficient Market Hypothesis argue that if you understand the reason for bubbles to form, you can recognize them in the market and use this information to your advantage. Under the recognition method utilized by Robert Shiller, namely that catchy "stories" lead to investment bubbles, may suggest that the company Tesla (TSLA) may be currently experiencing such a bubble.

The rejection of EMH as explained by Robert Shiller is that the market does not behave perfectly rationally. Instead, he argues that bubbles that arise out of mass investor psychology may be products of irrational market behavior. Shiller argues that investors in the market have a tendency to want to consume stories about stocks:

Psychologists have argues there is a narrative basis for much of the human thought process, that the human mind can store facts around narratives, stories with a beginning and an end that have an emotional resonance...We need either a story or a theory, but stories come first.

This story line basis of thoughts by humans (and by extension, human investors) can disrupt the so called "efficient markets". When a large portion of investors get introduced on a story, say the internet craze of the early 2000s or the real estate market of '03 to '07, they tend to latch on the positive ideas that it offers and get hooked on the idea of a payoff. This causes investors to behave irrationally, investing in the idea rather than the numbers behind the company itself.

When looking out on the market today, one such story that has gripped many investors is the story of Tesla. The company has seen tremendous price appreciation since it went public in the middle of 2010, currently up over 875%. However, investors who have driven this price up might not necessarily be looking at the numbers behind Tesla, focusing more on its founder and CEO Elon Musk. A perfect example of this irrational investment came from a recent tweet of Musk:

Elon Musk, the billionaire technology entrepeneur, has announced a "major" new Tesla line that is "not a car", in a cryptic tweet which has left millions guessing...Shares in the electric car [company] jumped nearly 4 percent in just 10 minutes-adding a staggering $900 million to the company's market cap in just 115 characters.

While the prospect of a new revenue and profit stream for the company can perhaps move the needle of the valuation of the company, I believe that the market has reacted with irrational behavior to something that almost no one knows about. They increased the stock by 4% because of a simple tweet, implicitly assuming that everything creative genius Elon Musk touches will be gold. A more rational investor may look at this statement and attempt to wait to see what in fact the new product line will be or recognize that extending into product lines that may not align with the core competency of the company may ultimately dilute the share value.