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Perspective | The meteoric rise of Tesla's stock price is good for investors — even those who aren't directly invested in Elon Musk's car company – The Washington Post

There are times — such as this week — when watching the market’s reaction to Tesla news can make you laugh. Provided, of course, that you haven’t made bets that the company’s wildly high stock price will fall.
On Monday, Tesla and Hertz announced that the rental car giant is going to buy 100,000 Tesla Model 3’s over the next 14 months. Tesla’s stock, already mega high, rose 12.6 percent on the news, increasing its value by about $115 billion.
Why did the Hertz-related rise in Tesla’s stock make me laugh? It’s because the numbers make no sense to me.
Hertz, according to various reports, is going to pay about $4.2 billion — essentially list price — for these cars. That’s a lot of money, to be sure. But the question is, how much in after-tax profits will Tesla make on the deal?
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And does the stock’s rise — which added about $28 billion to founder Elon Musk’s net worth — make any financial sense?
Let’s be sports and say that Tesla’s profit margin on the Hertz vehicles is a very high 28 percent. Apply that to the $4.2 billion sales price, and you get a pretax profit of about $1.18 billion. Subtract 21 percent for federal income tax, and you end up with an after-tax profit in the $930 million range.
This means that the $115 billion increase in Tesla’s stock market value attributable to the Hertz deal is something like 123 times the after-tax profits that the deal is likely to generate. That’s an absurdly high ratio.
For a sanity check, I consulted research from two analysts who cover Tesla, one of whom thinks the stock is wildly overpriced, the other of whom thinks its current price of about $1,070 is reasonable.
Seth Goldstein of Morningstar raised his target price of Tesla stock to $680 from $650 on the Hertz news, which is still way below the current market price. “We think much of the good news is already priced into the stock,” he wrote to his clients, explaining why he raised his target price by only about a quarter of the market’s rise.
“We believe availability of these vehicles [as Hertz rentals] would give a much broader range of individuals an opportunity to drive a TSLA vehicle and could likely stimulate incremental demand,” wrote Colin Rusch of Oppenheimer, who left his $1,080 target price unchanged.
Monday’s rise was only part of Tesla’s huge stock price increase this month. As of Thursday, it was up 39 percent since Sept. 30.
Even many of us who wouldn’t own Tesla stock on a bet because it’s so pricey and quirky have made out well. That’s because Tesla has become the seventh biggest stock in S&P 500 and total stock market index funds.
According to Vanguard, Tesla was 1.71 percent of its Admiral class S&P 500 fund and 1.39 percent of the Admiral class of its total stock market fund as of Sept. 30, the last day for which public information is available.
While they were asleep, their Teslas burned in the garage. It’s a risk many automakers are taking seriously.
When I tweaked the numbers to account for Tesla’s 39 percent price rise this month (through Thursday), I estimated that Tesla had risen to 2.26 percent of the S&P 500 fund at Thursday’s close and 1.83 percent of the total stock market fund. So those of us who invest heavily in broad-based index funds have made out pretty nicely from Tesla’s meteoric rise.
Sure, we index-fund investors aren’t making anywhere near as much as Musk, whose wealth by my estimate has risen by $74 billion this month.
But we’re not taking anything like Musk’s risk, either. So let’s be happy for the money we’ve made from Tesla, and sit back and enjoy the show.
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