Market Watch: What's driving Tesla's trillion-dollar valuation?

Led by controversial billionaire Elon Musk, electric car company Tesla is never far from the headlines.

But when its valuation topped US$1 trillion last week even professional market watchers had to pinch themselves.

The company is now worth six times more than it was pre-pandemic. Its value surged 44 per cent through October.

It's been "a bit like watching a Tesla accelerate from nought to 100", said Pie Funds chief executive Mike Taylor.

"For a company of that size to rally that much in one month, it's almost unheard of."

Tesla had been swept up in another "euphoric" US investor surge, he said.

"I think that retail investor sentiment is very buoyant at the moment, so we've seen bitcoin rolling back to new highs and some of the big tech names."

There was one piece of fundamental news that may have been a trigger, he said.

"One of the rental car companies in the States announced they were going to buy 100,000 Teslas next year and that's roughly about 10 per cent of what they produce, so it's quite significant."

But the valuation was highly speculative based on its current position in the market, Taylor said.

For example, Toyota's market cap is US$245 billion.

"So last year the world produced 78 million cars and Toyota has an 8 per cent share of that."

Tesla was producing around 1 million cars a year and represented less than 2 per cent of the market.

"For US$1.7 trillion you could buy all the other car companies in the world," he said.

Tesla did look set to be one of the biggest electric vehicle players in the future, he said.

But its rivals and traditional car companies weren't standing still and were catching up on the technology front.

"I think it would be a very optimistic investor that would assume that Tesla might pick up 20 per cent of all global car sales," he said.

Tesla produces around 1 million cars a year and represents less than 2 per cent of the market.

"I think that people should be very cautious at the moment. It has gone up a lot in a very short space of time, and in these types of instances there's often quite vicious pullbacks in the price, so I would definitely urge caution."

However, there were a few things investors could look for to identify what makes these kind of tech stocks perform so well, he said.

"Does the company have a product that can capture the imagination of investors? I think that's the case with Tesla."

It was also important to consider whether it was a revolutionary new technology, he said.

"The third point would be, can you get mass participation by all investors, so not just institutional but retail investors. We've definitely got that with Tesla.

"The last point, I would say, is that is there a sort of really charismatic founder, leader of the company as we've gotten with Elon Musk."

Taylor owns a Tesla car but (by way of disclosure) notes that Pie Funds does not hold any stock.
- The Market Watch video show is produced in association with Pie Funds