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 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.
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.