By Eric Liu
The Rapid Rise of Tesla
Tesla Inc. shares soared to a historical record high of 1794.99 per share on July 13th, about one week before its release of second-quarter financials. Although the stock price fell in the following few days, its six-month average trailing market value exceeded $150 billion dollars for the first time ever. The stock gained almost 260% in just a year.
More importantly, Tesla reached its highest market value of 186 billion dollars and became the top of the auto manufacturers globally surpassing Toyota (Market value of 190 billion dollars). An auto manufacturer founded 17 years ago with an annual production of fewer than 370 thousand vehicles (data of 2019) exceeds the market value of a traditional company with annual productions of more than 10 million cars, Tesla has made history again.
As Tesla’s stock price soars, CEO Elon Musk is also receiving a big stock option incentive. Satisfying the requirement of a six-month average trailing market value of 150 billion dollars, Musk is eligible for the second Tesla option incentive of 1.69 million shares. Based on the strike price of $350.02 per option contract, Musk will gain a profit of 2.1 billion dollars selling the stocks, although these stocks are restricted to be sold in five years.
The first time Musk receives the incentive is only less than two months ago when the six-month average trailing market capitalization hits 100 billion. He received about 1.7 million shares of stock which valued more than 775 million dollars.
According to Musk’s contract with Tesla, he is not receiving any compensation and reward for ten years from January 1st of 2019. He will only receive an option incentive which is directly correlated to the performance of the company. According to Tesla’s six-month trailing market value, Musk’s option rewards are divided into 12 progressive targets. The first two goals which were already reached were 100 billion and 150 billion dollars. Each of the next target market value is another addition of 50 billion dollars. The total incentive in this contract includes 20.3 million shares of options which approximates to at most 56 billion dollars. This could be the incentive option contract with the highest value granted in history.
The Journey to the S&P 500
By Jun 26, Tesla has a market value of 262.82 billion dollars, overtaking many giants in the market.
For a company to enter the S&P 500, it is expected to meet certain criteria. Tesla already met the requirements of liquidity, market cap, and geographical location of headquarters in the U.S. Its biggest challenge, however, was positive reported earnings under GAAP standard for four consecutive quarters. With the newest quarter report, Tesla has made this true despite a large number of concerns due to the global pandemic. Therefore, Tesla is on the fast lane of entering the S&P 500. If Tesla is added to S&P 500, it will be the 15th largest company in regard of market cap in the S&P 500, placing between UnitedHealth Group and Nvidia.
The last time a “Super Large-Cap” been added to S&P 500 is when Facebook was added in 2013. This change will definitely have a large impact on the market. Adding Tesla to S&P 500 is signally a huge opportunity for this electric vehicle manufacturer. This might also bring a considerable amount of attention to the whole market of vehicles with sustainable energy. As talking about auto manufacturers, it is unavoidable to mention the new star of the market – Nikola Motors.
Nikola’s Competition with Tesla
Nikola is a start-up company located in Arizona founded in 2014, focusing on the development of new energy heavy trucks powered by hydrogen fuel cells and batteries. Nikola announced a challenge to Tesla (Tesla) Semi by launching its own new energy semi-trailer in November 2018. Interesting enough, Nikola Motors, along with its direct competitor Tesla, are both named after the famous Croatian scientist Nikola Tesla who had many major contributions to the field of electromagnetic and designed the modern alternating current (AC) system which is used in daily life and is a crucial part of the designing and production of motor vehicles.
Nikola was listed in an unusual way where they merge with a publicly traded special purpose acquisition company (SPAC) VectoIQ Acquisition Corp. (already listed with NASDAQ., Stock code: VTIQ). This move also made Nikola the world's "first hydrogen energy heavy truck."
At that time, Trevor Milton, the founder of Nikola, announced that the company had begun accepting orders for its newest pickup truck - badger, which is loaded with hydrogen fuel and battery packs and has a range of 600 miles.
The news was enthusiastically welcomed by investors as Nikola's stock price rose 103.7% and its market cap reaching 26.314 billion dollars.
However, Nikola's share price soon fell drastically. The company has brought much attention and arguments since before its IPO. The founder Milton has said that he is one of the few in the world who are able to surpass Elon Musk. He also expressed multiple times that the direct competitor of the company would be Tesla. Both Tesla and Nikola offer electric trucks, but the latter believes that energy networks are more important than trucks. Milton said that hydrogen production efficiency has been steadily improving, and costs have been declining, which will give hydrogen fuel trucks an advantage over battery-powered trucks charged in cities.
Much like the early stage of Tesla, Nikola is now facing many challenges. It has not yet delivered one vehicle and it is uncertain how long it will take for Nikola to start to make profit. Due to the business model of the company, the constructing and spreading of the hydrogen energy network will be crucial and decisive to the success of the company.
Sources: MarketWatch, Barrons, Electrek, Yahoo Finance, TradingView
Image Source: Alamy Stock Photos
By Disha Gupta
In the throes of the COVID-19 pandemic, biotechnology stocks are rapidly attracting public attention as the world gradually understands more about the nature and implications of the coronavirus. With strong fear and uncertainty, the general populous has turned to experts in the field; there is a lot of talk about the roles of vaccines and potential cures and treatments, which has accelerated considerable growth in the biotechnology industry.
While riding this bullish macro-growth wave may seem alluring to investors as a high-profit, low-risk opportunity, it is also critical to keep in mind the lifespan of these movements. The two main elements to consider when researching sectors and industries are the gains offered as potentials and the risk involved. Regarding this, many biotechnology stocks have tipped in the bullish direction almost constantly for the past few months. However, it is important to realize that this happens only with certain biotechnology stocks that emerge under the makeshift limelight created by the pandemic, and that volatility and risk accompany bullish spikes in these stocks.
Biotechnology stocks face risks related to the business more often than average stocks since they are usually bought in light of introducing “the next big thing” which can often result in failure. This higher risk in the business translates into their stocks as well. biotechnology stocks have skyrocketed, something which isn't very common. The suspecting eye may see that and only that, not the rest of the story.
In quantitative aspects, the net profit growth of the biotechnology industry for the past 5 years is 10.7%; on the other hand, the net gain of Nasdaq has risen by 231% in the same time. What this indicates is that biotechnology stocks aren't for the light hearted; it requires an immense amount of risk tolerance. A suitable example is the Amarin Corporation (NASDAQ: AMRN). In 2018, they were booming because of positive results from a study done in the cardiovascular branch. This provided a solid momentum into 2019 as well. However, Amarin’s stocks were hammered down to approximately 70% as of Q2 2020.
Patent protection and regulation are also significant concerns in the biotechnology industry. Sometimes due to these problems, the product that investors have rallied for doesn't even make it to the market. Currently, Novavax Inc. (NASDAQ: NVAX) does not have an FDA approved product yet, due to positive results from their clinical trials on potential coronavirus vaccines, the company’s stocks are currently undergoing a robust rally; as a quantitative reference, Novavax’s share price has multiplied by approximately 30 times in the last year.
It is also important to note that the biotechnology industry is currently trading much higher than regular times because of the pandemic. The situation, to some degree, resembles that in 2014 when the Ebola virus outbreak elapsed. There were many speculation that NewLink Genetics would find a successful vaccine and their prices were up in the $25 and $45 range. However, because of testing and approvals, it took five long years to get the vaccine into the market. Today, NewLink Genetics are selling at $1.
In conclusion, the biotechnology industry can be exciting and daunting at the same time. Risks are high as well as benefits. It is important to thoroughly understand the progress of biotechnology companies and acknowledge the volatile and uncertain nature of vaccine development under the current situation. One must have sound exit strategies and a high risk tolerance to effectively trade biotechnology stocks.
Disclaimer: Content provided by The Compass Forum is for educational purposes only and does not recommend or promote certain stock-trading decisions. All materials owned by The Compass Forum aims to provide a platform for deeper research only.
Image Source: Shutterstock
Article by Shivam Shah
Edited by Yihan (Bradley) Tian
Throughout this pandemic, the US government has gone through a process of quantitative easing (QE), in which it seeked to stimulate the economy through reductions in financial market volatility. As current quantitative easing measures continue, financial institutions have noticed a sudden influx of people buying substantially larger amounts of assets (i.e., mortgages) from the financial sector than they otherwise would have been able to acquire. This occurred during both the depths of the financial crisis in late 2007 and early 2008 and throughout the QE era.
This article examines the relationship between QE and private-sector investments. There are two important components: first, QE provided significant infusions of liquidity to the mortgage market, both directly via the Fed's purchase of treasury bonds and indirectly via the purchase of "mortgage-backed securities.” Second, QE opened up considerable new credit markets that would otherwise have remained closed to private lending. It's worth noting that during this period, even more important than such credit markets are private-sector banks, which are not being subjected to this QE liquidity influx. Given that banks are not subject to the liquidity regulations that the Fed was imposing on other entities (which included mortgage-backed securities), they were able to rapidly make loans that would not have been made had the Fed not been there to meet its lending limits.
So what impact did these additional liquidity injections have on private-sector lending, investment, and growth? Looking at the US Bureau of Labor Statistics (BLS)’s data through 2009, a year in which QE as an overall policy set was relatively loose, BLS data demonstrate that, in raw dollar terms, QE significantly increased private-sector investment in real residential construction, real commercial real estate, and related equipment by roughly $0.13 trillion, $0.12 trillion, and $0.08 trillion, respectively. Since this investment was generally from private-sector banks, this credit expansion would have been heavily restricted by the federal restrictions on banks' lending. In addition, BLS data show that, in the same timeframe, the government-supported QE programs (stimulus, in other words) provided nearly $2 trillion in aggregate investment. However, it is important to remember that a large portion of the QE credit expansion did not directly contribute to the actual expansion of private-sector lending. The increase in private-sector lending via QE as an overall policy was largely due to QE's effect on the Fed's balance sheet—and in particular, to its ability to sell Treasury bonds to the Fed. This was known as the "Federal funds rate targeting effect."
For both the effects of the Fed buying Treasury bonds and the effects of QE in aggregate, the observed effects were, for the most part, small and rapidly reversed themselves when QE's effectiveness in spreading inflation-sensitive asset prices through the economy was dramatically reduced. In this context, the Federal Reserve's ability to sell Treasury bonds to lower funds rate became important. The central bank is authorized to purchase securities through the Federal Reserve System with its base funds to lower the Fed funds rate target; in particular, the Fed can buy securities that it has previously purchased, back to the day of purchase. Selling Treasury bonds to the Fed in order to sell to the public directly is known as the reverse repo program.
Overall, Increased private-sector investment, more so than before and allowed, could lead to rapid aggregation of economic bubbles. Therefore, this relationship between QE and the private sector is important to monitor as it influences not only the stock market but also the financial security of the common public.