On Electrons and Bubbles
Events
- The S&P ended the week up 2.30%, year to date up 14.5% and hit an all-time high of 3,638 on Friday. The Clean Tech and OMX Water Indices similarly ended the week up 3.69% and 1.68%, making new highs along the way.
- General Motors announced it would dedicate itself to electric vehicles and other green power and reversed its prior stance of supporting the Trump Administration’s efforts to strip California of its ability to set stricter fuel economy standards. “Climate change is real and we want to be part of the solution by putting everyone in an electric vehicle,” stated Chairman and CEO Mary Barra.[i]
- President Elect Biden indicated he planned to nominate Janet Yellen, former Chair of the Federal Reserve, to the head of the Treasury Department. Yellen is known to Wall Street, widely respected, and – importantly – is not Elizabeth Warren who many in banking fear would enact a more draconian regime.
- Tesla continued its upward march after news of its pending inclusion in the S&P. The stock rose nearly 20% last week, 50% since the beginning of the month and 622% year to date.
On electrons and bubbles…
Markets always have narratives, that is human nature, and a large component of the stock market’s narrative right now is the imminent inclusion of Tesla into the S&P. Fans of Tesla are elated, and rightly so, it is a great company. But at 252 times forward earnings, investors should beware.
252 times next years earnings is a hard number. Some back of the envelope DCF calculations even with heroic growth, margin, free cash flow and perpetual growth assumptions exceeding 25% do not get us to the current valuation of half a trillion US,[ii] let alone a number that implies risk adjusted positive returns. Without going down the rabbit hole of assumptions and counter assumptions; let us simply observe that Amazon, at an enterprise value 3 times that of Tesla achieved trailing twelve month sales over 20 times greater and trades with at a comparatively mere 90 forward PE.
Another point to consider: Tesla will shortly suffer the fruits of its success marketing electric vehicles. Be careful what you wish for. Rivian, Fisker, and Polestar are new entrants into the BEV space whereas GM, VW, Ford and a host of other legacy car companies are ramping up their electric vehicle offerings and production. Tesla will unquestionably face much greater competition than it has heretofore.
And let us not forget Tesla’s impact on the Index itself; It is prospectively the 7th largest company in the S&P 500 now and its daily volatility currently doubles any comparably sized constituents. Tesla enthusiasts might applaud its entry into the S&P but indexers and passive investors beware: index holding may abruptly become a little less passive and noticeably more volatile, perhaps uncomfortably so.
Tesla is also joining the S&P 500 at what could prove to be an inauspicious moment, the index is presently trading at 26 times forward earnings. Bears will point to the year 2000 as the last occasion the market traded at such a lofty PE level, surely a bubble. Bulls will counter that the 10 year yielded over 6% back then whereas today…around 80bps and the resulting equity risk premium – well never mind. That debate will only amplify as we near year end.
Another richly valued part of the market is in stocks of solar providers, we can leave hydrogen for another occasion. Sunrun, First Solar, Enphase and Solar Edge trade with forward PE and PS multiples that are themselves a few multiples of the market. Enphase is presently at over 100 x forward earnings. Are these stocks overvalued? Quite possibly. In a bubble? Not as easy to say.
Unlike many of the bubble stocks of the TMT era these companies are generating free cash and prospects for solar are positive and still improving, not like Siberian Outpost or Boo.Com. Only 4% of homes in the US have solar power and solar comprises only 2% of utility solar generation domestically according to the EIA. California’s mandated blackouts this past week served as yet another indication that distributed energy generation is a viable way forward in the future. Our centralized grid is suffering too many reliability issues. Thus, companies involved in solar installations and the manufacture of panels and inverters will likely enjoy substantial growth over the next few years, which the market is discounting. However, here again we eventually run into the same challenge that is about to impact Tesla: other firms and parties observing the profits and prospects of an attractive industry will enter to try to capture some of those profits themselves. The winner’s curse. Arbitrage price theory tells us that ultimately any substantial advantages (read profits) will be impermanent.
As for the market through all this? I welcome any thoughts about valuation or the prospect of a bubble,[iii] but I remind myself and anyone willing to listen or unfortunate enough to overhear of Keynes’ maxim: markets can remain irrational longer than you can remain solvent.
JR
Opinions are expressed are solely my own. Any investments mentioned do not constitute a recommendation to buy or sell anything. If you do act on the opinions of errant writings without doing your own research you might consider talking to an investment advisor, a psychologist, foregoing that third drink or reexamining your decision-making process. I do cite sources and use end notes but amidst other responsibilities and foci I apologize for any plagiarism or regurgitation of other’s ideas though we all know there are not many original ideas. If you disagree with my content or opinion don’t read it.
[i] GM Press Release November 19, 2025.
[ii] I considered including my calculations in an end note but could quickly get overly complicated. Even a $20B terminal FCFE divided by a generously low WACC (of 5%) and an implausibly high 20% terminal growth rate in a Perpetual Model does not yield the present market cap moreover such a terminal FCFF would put TSLA in company with firms enjoying much higher operating margins than any industrial has ever dreamt of, let alone approached.
[iii] Not denying that the market is richly valued but the prospects of a bubble in many sectors of the market seems a bit less likely than in 99 with rates much lower, business models somewhat models sounder (remember Siberian Outpost?) and – for EV companies and Green Energy anyway – substantial growth over the next few years unlike in 1999 when many companies’ prospects were so ethereal they folded their tents in a matter of quarters.
