Last year I first heard about the efficient market hypothesis. It’s the idea that all available information on a company is already priced into it’s stock. And because I believe random things I read on the internet, I said sure, that makes sense. But I’m starting to form a better opinion on this idea and it’s divided into a few parts.

Growth vs Value Stocks

When you look at a company like Apple, I can agree with the hypothesis. We can estimate with a high degree of certainty how many phones and computers they will sell this year, which directly translates into revenue and value of the company. The next iPhone is a widely kept secret among anyone with access to the internet. We may not know every software feature that is coming in the next version of iOS but typically the ones that will move the needle are known about for months before release.

Tesla is on its way to becoming an Apple but still has some well kept secrets. The new Model 3 and Model Y were in spy photos, patents from a few years ago point to probable upgrades, and updates from supply chain partners give us a good idea of how well the batteries will perform. You have to know which YouTubers or X accounts to follow to get early access to the information, but it is there. At the same time, for how large the company is, Tesla is doing a surprisingly good job of keeping its new products under wraps until the official unveiling. With a product unveil within the next 3 months we still have little to no information on the lower cost vehicle Tesla is going to start manufacturing this year.

There are multiple reasons why this is happening, particularly because Tesla wants to avoid the Osbourne effect, but the point remains, until Tesla has finished building out its product lineup, we will continue to be surprised about exactly what they are working on next and the impact of those products. For this lower cost vehicle, how many will they sell? How much will they cost? Is it a sedan, SUV, crossover, or all of the above?

Timing Disconnect

The biggest issue with this hypothesis for me is we see the market fluctuating between being efficient and inefficient. And in Tesla’s case, these cycles line up with the rollercoaster of a stock price. The Model 3 ramp up was a tough period for the company and their success in scaling production wasn’t a given but even after they hit volume production in the summer of 2018, the stock didn’t fully reflect this achievement until 2020 through 2021.

One of the most notable periods where the stock price matched public information was after the We Robot event and Trump election win. The stock went on a run up to $475 as investors understood that robotaxis would soon become a reality and the path to having them on the road was clear. But since then negative press has cut the stock in half although the data doesn’t support it. At the very least the hypothesis needs to have a caveat or two that it isn’t always efficient.

Emotion Driven

With that last point, I struggle to agree with a hypothesis with efficient in the name when a stock like Tesla’s is fueled by emotion. The ride to $475 ran on excitement and the fall to$200 was based on fear. Hundreds of billions of dollars in value being adjusted based on feelings. And the contrast is exacerbated by Elon Musk re-affirming the plan to build 5,000 to 10,000 Optimus robots this year and the stock doesn’t move an inch. There are analysts that didn’t hear that estimate the first time it was said and this time they still don’t include it in their models. The market can’t be efficient when, a company as publicized as Tesla, has analysts who aren’t pricing in a product line that will make up a majority of the company’s revenue and value in the next few years.