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SEC Chair Worried Amateurs Will Get Hurt in Stock Bubbles Like Tesla

Last Updated September 23, 2020 2:08 PM
W. E. Messamore
Last Updated September 23, 2020 2:08 PM
  • When asked about Tesla stock Thursday, the SEC Chair said, “I do worry.”
  • TSLA has more than doubled in price since CEO Elon Musk called it overvalued on May 1.
  • Retail investors can’t get enough of it, even though a fundamental analysis strongly indicates what they’re doing is crazy.

The Securities and Exchange Commission’s (SEC) job is to make sure investors don’t get hurt by unfair or unruly markets.

As Tesla stock (NASDAQ:TSLA) takes off like one of Elon Musk’s rockets, SEC Chair Jay Clayton is sweating bullets. He’s worried about retail investors pumping Nasdaq values with massive inflows for short term trades.

Clayton warned on CNBC’s “Squawk Box” Thursday that booming stocks won’t pull off nearly as soft a landing as a SpaceX Falcon 9.

He says the boom in short-term retail stock trading represents a significant risk :

What we are seeing is significant inflows from retail investors, and they have the hallmarks of short-term inflows. And does that concern me? Sure. Because that’s more trading than investing. Short-term trading is much more risky than long-term investing, and so I do worry.

Watch SEC Chair React to Question About Soaring Stock Values

Clayton had more to say about the disconnect between valuations and reality. Watch:

The SEC chair didn’t call out any particular stock by name, but Tesla tops the list of raging equity valuations. Clayton’s answer came after CNBC’s Andrew Ross Sorkin pointed out that Tesla is now worth more than the top three or four U.S. automakers combined. Its market cap is currently at $300 billion.

After reporting four consecutive quarterly profits, Tesla is now eligible to join the S&P 500 Index . If it were an S&P 500 company already, TSLA would have grown more than any other stock in the first six months of 2020. The highest performer in the benchmark grew 83% by Jul 1 . Tesla stock revved up by 160% over the same period.

Retail investors shouldn’t get too excited by the automaker’s stock price or its profits. Tesla’s profits are driven by government subsidies, while sales from its core business are falling. Meanwhile, it’s cutting R&D spending to boost that bottom line, but at a potential cost to future EV market dominance.

Elon Musk, who already warned TSLA is overvalued this year, has specifically promised to keep profits low . He’d prefer to continue making his cars and trucks more affordable. That’s good for consumers and the environment, but not so promising for shareholders.

Fundamental Analysis: Tesla Stock Is A Massive Bubble

elon musk tweet tesla stock too high
Even Elon Musk, Tesla’s founder and CEO, said the stock price was “too high” in May. It has more than doubled since then. | Source: Twitter 

A sober fundamental analysis of Tesla stock shows just how crazy it is for the retail crowd to keep piling in at this entry point. Its market cap is larger than Toyota (NYSE:TM), General Motors (NYSE:GM), and Ford (NYSE:F). Meanwhile, its sales make up less than 5% of those three rivals’ total revenue :

Put another way, a dollar of Tesla [sales] is worth $9.67 to investors; whereas that same dollar of Toyota sales is worth 65 cents; GM (27 cents); and Ford (17 cents).

Social Capital CEO Chamath Palihapitiya says Tesla could one day be worth trillions  because of its renewable energy components. That day isn’t here yet, and the rush of investors resembles the too-early excitement for the Internet in the late-1990s.

The endless appetite for Tesla stock among Robinhood  traders suggests trouble ahead when they don’t get rich quick, and the bubble pops.

Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com.