Here’s a new rationale for why Tesla’s stock is skyrocketing

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Tesla stock hit $ 1,923 shortly after Tuesday’s opening – another record high – adding to the company’s incredible year.

Shares were up 3.5% to $ 1,900.00 later Tuesday morning. The stock (ticker: TSLA) is up around 350% year-to-date and 750% from last year. He is now worth around $ 355 billion and over $ 400 billion on a fully diluted basis, which represents management stock options.

The race has generated a lot of debate on Wall Street – not so much about why the stock is rising, but why so much.

The impact of the upcoming inclusion of the S&P 500 and stock splits on the stock are two oft-cited reasons for the 33% rise since the month. It’s possible, but Barron’s still think that these factors cannot explain a one-third jump.

Tesla’s most recent quarterly earnings qualified it for inclusion in the S&P, which is driving demand for the action from index funds. And management announced a 5-to-1 stock split last week. Splits are expected to generate more demand from individual investors.

Both are technical factors that shouldn’t make a long-term difference to the fundamentals of the business. But the people who bought the stock believing that both were material catalysts are richer. Money helps win arguments on Wall Street.

The recently released quarterly profit certainly helped. In fact, the main reason for the rush of stocks is profits. Tesla’s numbers have been much better than expected for several quarters. And Wall Street’s estimated earnings for 2021 have fallen from less than $ 12 to nearly $ 15 a share in recent months. The profit momentum is a big problem.

Wall Street has had an impact in another way as well. Bearish analysts are throwing in the towel.

Tesla is not very popular on Wall Street. Six out of 36 analysts rate stocks for buy and 13 for sell. The average purchase ratio of the shares of the Dow Jones Industrial Average is approximately 55%. The average sales rating ratio is around 7%.

Last week, Morgan Stanley and Bank of America both improved their Hold from Sell stocks and raised their target prices. Help with upgrades. Now, the average analyst price target for the stock is around $ 1,200, down from around $ 300 at the start of the year. The target price hike of 300% is approaching the rise in the share since the start of the year.

Credit Suisse analyst Dan Levy wrote on Tuesday that Tesla’s high share price gave it a cost of capital advantage over its peers. It’s a strange reason to be positive on a stock, but it was part of Bank of America’s upgrade case as well. As the stock grows, Tesla costs less in issued shares to build a new manufacturing plant.

Wall Street backs Tesla stock, though support is reluctantly.

Another reason Tesla shares could be on the run is financial technology. This is Barron’s new idea to help explain the “how high” part of Tesla’s stock. Here is the reflection.

Wall Street innovates, but unlike technologies such as iPhones or 5G and, innovations can cause volatility and unintended consequences.

For example, the innovation of portfolio insurance helped catalyze Black Monday in 1987. The proliferation of credit default swaps helped create the financial crisis. Trading rules and automated trading were part of the story behind the 2010 flash crash.

It takes some time for traders and investors to adjust to new things.

Now, commission-free trades and share ownership on platforms like Robinhood are new things. The precise impact is difficult to measure, but it is partly responsible for the volatility and larger-than-expected price swings of stocks these days – including Tesla.

It might be a bit of a stretch, but academics will study free trade and write papers quantifying the effects later. And a new business paradigm is as good a reason as any.

Write to Al Root at [email protected]