What You Say about Elon Musk Doesn’t Affect Tesla Stock Prices

Tesla’s CEO Elon Musk and Tesla’s stock (NASDAQ: TSLA) couldn’t more polarize the investment community. It seems as though everyone has a strong conviction held deep down in their heart of hearts about electric vehicles, Tesla, Elon Musk, and TSLA. Most of us cannot differentiate between our feelings and facts when we use the word, Tesla, in a sentence. Everywhere you look, you can find sharply contrasting statements on the same page of any media outlet:

“Elon Musk is arguably America’s greatest living innovator. He has achieved success with nearly everything he has touched and has been doing so ever since he sold his first piece of software at the age of 12, a computer game called Blastar.”

Susan Pulliam, Mike Ramsey and Ianthe Jeanne Dugan (Wall Street Journal):

“In the past five years, though, Tesla has fallen short of more than 20 projections made by Mr. Musk, ranging from car-production output to financial targets, according to an analysis by The Wall Street Journal. The company missed 10 of his stated goals by an average of nearly a year. Tesla’s Model S sedan was rolled out on schedule in 2012, but its Model X sport-utility vehicle was delayed nearly two years before its debut last September. The Model 3 sedan, initially targeted for roll out by the end of 2014, was unveiled in March and won’t be delivered to customers until next year.”

Trentbridge (SeekingAlpha):

“Let’s sum up: Elon Musk is a showman who lies and makes false promises probably worse than Bernie Madoff. Tesla is a giant Ponzi scheme – built to fleece investors and make (badly) cars nobody but rich Californians want or desire. This entire fraud is propped up by Federal tax subsidies and the State of Nevada. The Fremont factory is packed with so many workers it is seven times less efficient than a regular car factory.”

“These various subsidies are nothing more than legalized thievery. Selfish worshipers are the legalized thieves. Elon Musk is working his political pals hard to get legalization of even more of this thievery and he will without doubt succeed in his sinister effort since he has many very powerful politicians in his pocket and he is skilled at political corruption.”

How can all of these perspectives exist when we all use the same public information?

As investors, we should focus our attention on Tesla price movements which only depend on company’s future free cash flow. Yet, there has been no evidence that a company’s free cash flow can be affected by social sentiment, as all these words are simply sentiments held by individuals. Though, it is only natural to expect that social sentiment may affect stock prices, albeit in the short term. In this article, let’s see if words can affect stock movements.

How to Measure Sentiment?

To measure and quantify the opinion of Tesla (and Musk), I resolve to use the “modern” gold standard of communication, tweets. From tweets I obtained empirical data regarding the market sentiment for the purposes to analysis. I use Thompson Reuters new module of its “Social Media Monitor,” which uses “content analysis” to measure the degree of positive/negative tweets related to some key words. The Thompson Reuters sentiment engine is a proprietary tool to analyze social media content for expressions of positive, negative, and neutral sentiment. The engine has been tested at various natural language processing (NLP) competitions, and boasts a top-of-the-line accuracy level of approximately 70%. This tool provides a real-time measure for sentiment, in terms of % of positive tweets, for each stock.

In Figure 1, I show the % of positive Tesla tweets and TSLA prices over time for last 12 months. For the first few months, it appears that the Tesla sentiment has a mixed relationship with the stock prices. On the other hand, for the past few months, the sentiment has visibly come down, while the stock has made large advances. Overall, the stock continued to rise regardless of the fluctuation of market sentiment.

Does Your Opinion on Elon Musk Matter?

To my surprise, or maybe not, there is no apparent relationship between Tesla sentiments and Tesla stock prices. In fact, the statistics shows there is no significant relationship. I further correlate Tesla stock returns with Tesla sentiment numbers, and as expected, there is no relationship between the two, either (Figure 2). In other words, your opinion on Musk has no impact on Tesla stock prices or stock returns.

This may sound counter-intuitive at first. Because you would expect people’s feelings have an impact on what they are willing to pay. However, the truth is what you say and feel doesn’t affect stock prices. The truth is what you say about Elon Musk does not affect Tesla stock prices. The truth is there should not be a casualty from sentiment to stock prices.

The Limitation of Sentiment Data

However, I am interested in seeing why Tesla sentiment can change over time. For that angle, I did find a positive relationship between recent stock performance and the current positive sentiment toward Tesla. It seems plausible since investors are usually happy if their stocks went up. On the other hand, I noticed the pattern that negative sentiment rises when the stock becomes increasingly overvalued (Figure 3). Call it jealousy or unfairness, the bottom line is that the sentiment data shows a dislike of Tesla’s stock souring for no fundamental reasons at all.

“Tesla” may be the most controversial single word on SA. Any mention of Tesla automatically draws instant, opposite opinions from critics and followers. We often talk as if our words can sway other’s opinion, which they never do. We often talk as if our words can affect stock prices, which they never do. We often react to other’s words as if they can affect stock prices, which they never do. The simple test in this article proves “the irrelevance.”

Finally, I would like to quote Efraim Levy’s words to conclude:

“Tesla is an incredible company with a genius CEO who is revolutionizing the auto industry and a few other industries. It is changing the way people do business in the industry. But people were paying a lot in advance.”

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