Elon Musk made nearly $ 4 billion richer on Wednesday morning, likely before he even got out of bed. Why? Because on Tuesday night, Tesla (a fifth owned by Musk) announced a “stock split” that, in pre-market speculation early Wednesday, pushed the company’s already stratospheric valuation up an additional 7%.
Yet a stock split is just a housekeeping arrangement. This is when a company splits the existing stock of its stock into several new stocks, usually because the stock price has reached such high levels that even buying a stock seems too expensive for small investors. .
The total dollar value of a business should remain the same compared to the pre-split amount. But logic left the Tesla share price a long time ago.
Tesla shares have gone from $ 229 a year ago to around $ 1,500 in recent weeks. Feverish small investors (almost half a million Americans are betting on Tesla on the only commission-free trading app Robinhood) have even started buying fractions of a single Tesla share to join in the fun.
After the shares split, it will cost around $ 275 to buy a single share, as Tesla splits each share into five. Obviously, the idea behind this early 7% surge was that more small traders could jump and with more demand the stock price should rise.
A 7% increase in the Tesla share price translates into extraordinary numbers. The total valuation of the company is approximately $ 272 billion. A 7% rise in its share price is equivalent to $ 19 billion, more than the total current value of Fiat Chrysler, once one of Detroit’s Big Three automakers.
Elon Musk owns around 20% of the company, worth around $ 55 billion. A 7% increase therefore adds about $ 3.8 billion to his fortune.
Yet there has been no change in the business of the company, no new car launch, no new battery advance. What drives Tesla is what market traders refer to as “momentum” rather than fundamentals.
Tesla is, of course, far from the first to carry out a stock split. Apple and Google did so as their stock prices rose, and it didn’t hurt shareholders. All the pundits who said Tesla was seriously overvalued at $ 300 a share, or $ 500 a share, or $ 1,000 a share, have turned out to be seriously wrong. Not only is it the world’s leading manufacturer of electric vehicles, but it overtakes the other three largest manufacturers.
There are plenty of reasons Tesla is a great company – don’t confuse it with the stock price.
Even Beirut explosion unlikely to spur corruption to end
Lebanon had a failing economy before the explosion that devastated Beirut last week. Unless the change happens quickly, it is likely to become a failed state, writes Larry Elliott.
Humanitarian aid is coming, but the country’s needs go far beyond. Lebanon has 40% inflation and the economy is now expected to contract by at least 25% this year. Rebuilding Beirut will cost 5% and that’s money Lebanon just doesn’t have.
Obviously what the country needs is a big bailout from the International Monetary Fund, but the IMF is not allowed to lend to countries that have no chance of paying back what they borrow. Canceling Lebanon’s pre-existing debts would help but not suffice.
Talks between Lebanon and the IMF on financial support have been going on for months but have stalled. The IMF, as its managing director Kristalina Georgieva made clear after the explosion, fears that without stronger action to fight corruption, all aid would be wasted or diverted. Sadly, Georgieva is right about this.
The IMF’s plan for Lebanon seems reasonable enough: action to make public finances sustainable; capital controls to keep money out of the country; measures to stem losses in public industries which are riddled with corruption; and a stronger social safety net to protect the poor.
However, none of this will happen without the political will to build effective, accountable, clean and reliable institutions. There is a chance that public disgust at the incompetence and neglect of the Lebanese ruling elite will be the catalyst for real change. Rather, it seems more likely that the explosion will lead to a power vacuum that other countries – Iran and Saudi Arabia, for example – will want to fill.