Tesla Joins The Trillion Dollar Club

Tesla Joins The Trillion Dollar Club
Reda Farran, CFA

over 2 years ago2 mins

Mentioned in story

Earlier this week, car rental company Hertz announced that it’s buying 100,000 Tesla Model 3s for $4.2 billion – the biggest EV purchase order ever. Tesla’s stock shot up 13% after the news, adding $118 billion to its market capitalization and pushing the firm’s total value past the $1 trillion mark. Tesla is now the second-fastest company ever to reach this mark, taking just over 11 years since its public debut in June 2010. Facebook did it faster, although its market value is now below $1 trillion.

The question is, how does a $4.2 billion purchase order create $118 billion in market value? Before the news was announced, Tesla’s stock traded at a valuation multiple of 13x 2022’s forecasted sales. So a market value jump of $54.6 billion (13 X $4.2 billion) would be understandable. But Tesla’s market value increased by more than double that, and there could be two reasons why.

The first reason is based on fundamentals. See, the total value of this purchase order to Tesla is bigger than the $4.2 billion headline figure. Hertz is one of the largest car rental companies in the world, and its new Tesla fleet will allow EV-curious customers to test drive the Model 3. That could be the catalyst for more people to switch to EVs and could also spur more Tesla sales down the road. What’s more, Tesla will also benefit from exposure to a big Hertz ad campaign starring seven-time Super Bowl Champion Tom Brady. This is essentially free marketing from Tesla’s perspective.

The second reason is based on technicals. According to Bloomberg, call option bets on Tesla skyrocketed to a 14-month high Monday, with the short-term options making up the lion’s share of the action. That forced market makers – the big financial firms that sell and trade options – to scramble to hedge their exposure by buying Tesla’s stock, contributing to its 13% price rally on Monday.

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