Tesla and MicroStrategy demonstrate the impact of narratives on stock market valuations.
In today's stock market, the most compelling narratives triumph. This is never more evident than in Tesla's shares.
The bullish argument for Tesla primarily relies on a straightforward narrative: Elon Musk's close ties with President Trump will significantly benefit Tesla. Investors are jumping on this narrative with enthusiasm. As reported, Musk allegedly invested $277 million to support Trump and other Republican candidates during the November elections. After Election Day, Tesla's stock soared an impressive 72%, adding an extraordinary $570 billion to its market value.
Bloomberg's Esha Dey highlights Musk's political maneuvering in an article: "What triggered the turnaround? There were no positive changes at the company, where demand for its vehicles remains shaky and the future appears increasingly uncertain. Instead, it was what investors considered a political masterstroke by Tesla's leader, Musk, who aggressively supported Trump during the campaign and took on an unofficial role in his administration. Steve Sosnick, chief strategist at Interactive Brokers, asked, 'How do you put a value on the fact that Musk has deep access with the incoming administration? You can assign almost any number to it.'"
Tesla isn't the only company benefiting from a captivating tale—story stocks are everywhere.
MicroStrategy (MSTR) is another excellent example. This year, its shares have increased by 422%, contributing approximately $69 billion to its market capitalization. MSTR currently trades at 122 times sales, which appears excessive considering the S&P 500 trades at 3 times sales. However, investors disregard MSTR's historical valuation and income statement due to a captivating profile of the company's future financial health.
MSTR's financial profile is dominated by Bitcoin. Led by a charismatic CEO named Michael Saylor, MSTR has transformed itself from a modest software company into a dynamic Bitcoin acquisition entity quickly. According to Saylor, Bitcoin is the top-performing asset in history, has considerable growth potential, and MicroStrategy has developed a groundbreaking approach to buy large quantities of Bitcoin before numerous countries, companies, and individuals do so.
MSTR has been on a frenzy of equity offerings since late October when it announced plans to sell $21 billion worth of stock and a similar amount of bonds to purchase Bitcoin through 2026. The company now owns around 439,000 coins worth approximately $42 billion, accounting for just over 2% of the world's Bitcoin and making it the largest corporate holder globally.
Through creative storytelling, Saylor has transformed a previously uninteresting corporation into a thrilling method of investing in the world's top cryptocurrency story. And by doing so, he's catapulted his company into the NASDAQ 100.
Not every company or industry exemplifies the skill of selling its story as effectively as Musk and Saylor. Executives in the Energy sector could learn a great deal from these two.
Since November 25, the S&P 500 Energy (XLE) ETF has seen a downward trend almost every day, dropping by 11%. Crude oil has gained 4.0% over the same period. This discrepancy makes no sense from a fundamental perspective. Traditionally, there is a strong connection between oil prices and energy shares, as oil prices significantly impact earnings.
However, these aren't ordinary times. It's becoming increasingly apparent that capital markets are becoming less grounded in fundamentals. A higher proportion of the stock market is driven by retail and passive investors than ever before, which means there are few professionally trained investors who excel in analyzing fundamental numbers.
If energy CEOs wish for their shares to align more closely with their earning power, they need to concoct a more appealing narrative to win over investors. The Energy sector is undervalued compared to the rest of the market for a reason. It's due to the overwhelmingly negative sentiment shrouding the sector. The industry must challenge the narrative that promotes the decline of fossil fuels and create a compelling storyline about innovation, transformation, and enhancing humanity. The P/E ratio will follow.
Valuations will always factor into investing, but their importance has evolved over time. Modern investors who rigidly adhere to specific valuation metrics to make their investment decisions are overlooking significant changes, such as social media, iPhones, meme coins, and other forms of technology, that have amplified the influence of storytelling on the investment equation.
If you're searching for theme ideas for 2025, here are areas I see immense potential: AI, quantum computing, drones, space, nuclear, lasers, robotics, gig economy, and Fintech.
Michael Saylor, the CEO of MicroStrategy, has been instrumental in transforming his company's narrative. After announcing plans to invest heavily in Bitcoin, MicroStrategy's shares saw a significant increase, with a 422% rise this year and a current trading price of 122 times sales. Elon Musk and Tesla have also benefited from compelling narratives, with Musk's political ties and Tesla's innovative technology driving a 72% stock price increase after the US elections.
