Elon Musk got nearly $4bn richer on Wednesday morning, probably before he even got out of bed. Why? Because on Tuesday evening Tesla (one-fifth owned by Musk) announced a “stock split” that in pre-market speculation early on Wednesday drove up the already stratospheric valuation of the company by another 7%.
Yet a stock-split is merely a housekeeping arrangement. It’s when a company divides the existing shares of its stock into multiple new shares, usually because the share price has reached such high levels that even buying one share looks too pricey for small investors.
The total dollar value of a company should remain the same compared to the pre-split amount. But logic left the Tesla share price long ago.
Tesla shares have rocketed from $229 a year ago to around $1,500 in recent weeks. Feverish small investors (nearly half a million Americans punt on Tesla on the commission-free trading app Robinhood alone) have even taken to buying fractions of a single Tesla share to get into the party.
After the stock split it will cost around $275 to buy a single share, as Tesla splits each share into five. Evidently the thinking behind that 7% early surge was that more small traders could leap in, and with more demand, the share price should rise.
A 7% rise in Tesla’s share price translates into extraordinary numbers. The company’s total valuation is around $272bn. A 7% rise in its share price is equal to $19bn, or more than the entire current value of Fiat Chrysler, once one of the big three of the Detroit auto makers.
Elon Musk owns around 20% of the company, worth about $55bn. So a 7% rise adds around $3.8bn to his fortune.
Yet there has been no change to the company’s business, no new car launch, no new battery advance. What’s driving Tesla is what market traders call “momentum” rather than fundamentals.
Tesla is, of course, far from the first to do a stock split. Apple and Google have done them as their share prices have risen, and it didn’t hurt shareholders. Every pundit who said Tesla was seriously overpriced at $300 a share, or $500 a share, or $1,000 a share has been proved seriously wrong. Not only is it the world’s number one electric vehicle maker, it outsells the next three biggest put together.
There’s plenty of reasons to say Tesla is a great business – just don’t confuse that with the share price.
Even the Beirut explosion is unlikely to prompt a clear-out of corruption
Lebanon had a failing economy before the explosion that devastated Beirut last week. Unless change happens swiftly, it risks becoming a failed state, writes Larry Elliott.
Humanitarian assistance is arriving but the needs of the country go well beyond that. Lebanon has inflation nudging 40% and the economy is now likely to contract by at least 25% this year. Rebuilding Beirut will cost 5% and that is money Lebanon simply does not have.
Clearly, what the country needs is a big rescue package from the International Monetary Fund but the IMF is not allowed to lend to countries that have no chance of repaying what they are borrowing. Writing off Lebanon’s pre-existing debts would help but would not be enough.
Talks between Lebanon and the IMF over financial support have been going on for months but have stalled. The IMF, as its managing director Kristalina Georgieva made clear following the explosion, is worried that without stronger action to tackle corruption any help would be squandered or misappropriated. Sadly, Georgieva is right about that.
The IMF’s plan for Lebanon looks reasonable enough: action to make the public finances sustainable; capital controls to prevent money flowing out of the country; measures to stem the losses in state-owned industries that are riddled with corruption; and a stronger welfare safety net to protect the poor.
None of this will happen, however, without the political will to set up effective institutions that are accountable, clean and trusted. There is a chance that public disgust at the incompetence and sleaziness of Lebanon’s ruling elite will be the catalyst for real change. It looks rather more likely that the explosion will lead to a power vacuum that other countries – Iran and Saudi Arabia, for example – will be eager to fill.
