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Why Tesla Stock Revved Even Higher Today

By Rich Smith – Oct 26, 2021 at 11:20AM

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$1 trillion in market cap was only the beginning.

What happened

Success begets success -- and boy, is Tesla (TSLA -0.40%) ever begetting it!

Last week, Tesla stock roared ahead after the electric-car giant reported 57% improvement in sales, 73% more deliveries, and adjusted earnings per share up 145% year over year. The stock leapt again yesterday when Hertz announced plans to buy 100,000 Teslas for its rental car fleet.

But why is Tesla stock up another 5.5% today (as of 10:33 a.m. EDT)?

Lights streak down a red electric car racing down the highway

Image source: Getty Images.

So what

Since Tesla reported earnings last week, its stock has gained nearly 25% in market cap. Yesterday, the company passed the $1 trillion mark for the first time in its history. Today, there may be no specific, material news behind Tesla's continued gains, but that doesn't matter, because the kind of momentum Tesla is currently enjoying can become a sort of self-fulfilling prophecy.

Not to put too fine a point on it, but I honestly believe that right now, Tesla stock is going up because it's going up.

Now what

Does this make Tesla a "momentum stock," though -- where its rising stock price has no basis in fact?

Not necessarily. As Morgan Stanley pointed out earlier today in a note covered by, "the Tesla you see today reflects a very differently resourced, pre-COVID Tesla," which was, to an extent, constrained by lack of access to cash. It needed to periodically dilute shareholders with new issuances of shares to keep itself solvent and provide the capital needed for expansion.

Today's Tesla still can sell shares to raise cash quickly, mind you. But its massive stock market valuation means it can now sell fewer shares than might once have been necessary to raise more cash than it once would have ever dreamed possible -- and with minimal dilution of its shareholders. And this will permit Tesla to put the pedal to the metal on growth.

How fast can Tesla grow, and what does it mean to shareholders? Morgan Stanley estimates that from now through 2030, every 1 million cars Tesla sells will generate approximately $50 billion in revenue for the business, $10 billion in earnings before interest, taxes, depreciation, and amortization (EBITDA), and add $150 to $200 per share in value to the stock.

In short, because Tesla has passed $1 trillion in value ... its stock is now only going to go higher.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Tesla. The Motley Fool has a disclosure policy.

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