Significant Mispricing Of Tesla Stock Usually Occurs During After-Market (2025)

Tesla’s stock price behavior is baffling to most analysts and investors. Media attention in major outlets such as the Financial Times and Bloomberg have been highlighting the stock price’s strange twists and turns.

The behavior of the company’s stock price stems from its movements being at stark odds with underlying fundamentals. There are compelling reasons to infer that the price-fundamentals gap might be part psychological and part manipulation.

Hyperbole is a psychological phenomenon. An article that appeared in the Financial Times explicitly mentions hyperbole as being one of Tesla’s major assets. This article refers to after-hours traders parking fundamentals and instead trading on vibes.

Consider the following line in the song “I Dreamed a Dream” from the musical Les Misérables: “But the tigers come at night, with their voices soft as thunder.” These tigers serve as a metaphor for market participants who are engaged in manipulative trading activities in the after-market. The Financial Times asks whether something else is going on with overnight trading in Tesla’s stock, besides vibes.

An article that appeared in Bloomberg discusses whether the “something else” might be price manipulation by quantitative market-neutral trading firms. The alleged manipulation involves these firms inflating their portfolios around the opening of the market, and reducing the inflated positions around the same-day close.

Price-Fundamentals Gap

JPMorgan analysts have been tracking Tesla’s price-fundamentals gap for over a decade. The Financial Times interviewed its lead analyst, Ryan Brinkman. Brinkman has been bearish on the stock for several years. His approach to fundamentals-based valuation centers on the present value of a company’s forecasted free cash flows. Free cash flows are defined as the amount of cash a company generates in period of time (such as a year), which is available to be paid to both the company’s debtholders and shareholders. The fundamental value of the company’s stock is determined by the portion of the free cash flows available to be paid just to the shareholders.

Only a minority of analysts use the PV of free cash flows when setting price targets. In this respect, Morgan Stanley sell-side analysts also assess Tesla’s price-fundamental gap using the PV of free cash flows. Notably, the Morgan Stanley analysts have been more bullish on Tesla’s fundamentals than their JPMorgan counterparts. To see why, consider the chart below. The chart depicts the free cash flow forecasts developed in 2020 by the teams at the two firms, for the period 2020 through 2035. Notice that after 2021, the Morgan Stanley forecasts lie above the JPMorgan counterparts.

On a technical point, I should mention that analysts rarely report the values associated with the constant growth portions of their forecasts, called the “terminal horizon forecasts.” I have constructed these values by using inferential formulas. Notably, most of Tesla’s fundamental value relates to the terminal horizon. I should mention that I reached out to JPMorgan, Morgan Stanley, and Tesla for comments, but received no response.

The free cash flow chart also displays the value of Tesla’s actual free cash flows for the period 2020 through 2024. In fact, the chart displays two actual free cash flow streams. The first is labeled FCF and the second is labeled FCF:Capex. FCF are the cash flows that conform to the definition of free cash flow provided above, namely the amount of cash a company generates over time, which is available to be paid to both the company’s debtholders and shareholders. A key term in the formula for FCF is cash flow from investment. In practice, analysts use capital expenditure in place of cash flow from investment; and therefore, FCF:Capex does the same.

The chart indicates that analysts at JPMorgan underestimated Tesla’s FCF:Capex for the entire period 2021 through 2024, while the analysts at Morgan Stanley underestimated Tesla’s FCF:Capex for 2021 and 2022, and overestimated FCF:Capex in 2023 and 2024.

As for the period after 2024, a report in Seeking Alpha describes a pessimistic sales outlook for Tesla. The article emphasizes the damage to Tesla’s brand, stemming from the role of Tesla’s CEO Elon Musk in mass U.S. government layoffs. Extrapolating the FCF:Capex chart for the period 2025 through 2035 suggests that the JPMorgan and Morgan Stanley forecasts might both prove to be highly optimistic.

Even more important is that the actual free cash flow stream, FCF, lies well below the FCF:Capex stream. In fact, FCF is negative for 2023 and 2024. This means that during 2023 and 2024, the direction of cash flow was from the debtholders and shareholders of Tesla to the company, not the reverse. In reality, both analyst teams seemingly overestimated Tesla’s free cash flows in the years 2022, 2023, and 2024.

The upshot of this free cash flow overestimation is that analysts have been overestimating Tesla’s fundamental value for years. I made this point previously, in a post titled “How Overvalued Is Tesla’s Stock, Really?” As for hyperbole and psychology, I made this point in a post titled “Tesla’s Powerful Narrative Is Propelling Its Stock Price.”

Since mid-December, Tesla’s stock has fallen by about 50% at a time when the S&P 500 has fallen by 16%. Yet, as the Seeking Alpha article reminds us, Tesla’s market cap still exceeds the combined market caps of Toyota, Ferrari, General Motors, Honda, Stellantis, and Ford Motor.

Price Manipulation

The manipulation contention about Tesla’s stock has been advanced compellingly by Bruce Knuteson, the CEO of Kn-X. The type of manipulation involves a trader increasing a security in his or her portfolio at the open, when liquidity is low, in order to drive up the price of the security. The trader then sells the security at the close, when liquidity is higher. Because of the difference in liquidity, the consequent decrease in price at the close is smaller in magnitude than the increase in price at the open, and so, as a result, the value of the trader’s portfolio increases. The overall effect is a decline in price in the period leading up to the close, coupled with an increase in price at the next day’s open. This is the basis for the higher overnight return, relative to the intraday return.

Following Knuteson’s lead, I analyzed the difference between the behavior of Tesla’s stock overnight, between the prior day close and the next day’s opening, and the behavior during trading day between open and close. Ignoring transaction costs, traders who bought at the open and sold at the close, from the time Tesla went public in 2010, would have earned, on average, a return of -0.025% per trading session. Had they instead bought at the close and sold at the open, they would have earned, on average, 0.16% per (after-market) session. These are geometric averages.

The difference in returns is colossal. The chart below displays the cumulative effect of doing these trades daily, beginning in 2010. Ignoring trading costs, overnight trading results in an initial dollar investment being worth about $381 today. In contrast, that same dollar invested intraday over the same period would have shrunk to 61 cents. In line with this pattern, the decline at the far right is 60% greater in absolute value for the intraday return relative to the overnight return. Notice that the two series in the chart relate to different vertical axes. If both series were graphed using a single vertical axis, the (blue) intraday series would hug the horizontal axis.

In standard financial theory, the analysis of different length periods of time is accomplished using mean return and volatility per unit time. Doing so facilitates and apples-to-apples comparison. The intraday period is typically 6.5 hours, whereas the overnight period is 17.5 hours (plus 48 hours for a weekend). Because the volatility per hour from market open to market close (1.2%) is 2.2 times greater than the volatility per hour from close to open (0.5%), it is reasonable to expect a much higher return from the trading day session. However, as discussed above, the numbers for Tesla display the opposite pattern, consistent with behavioral finance theory, not standard theory. Specifically, the mean return per hour from market open to market close is -0.04%, 0.013% below the mean return per hour from close to open, which is -0.09%.

It is important to be aware that there is no obvious way to make arbitrage profits in the situation just described, because the associated trading costs are too high. However, arbitrage profits are not the issue here. If market manipulation is the main driver of the phenomenon under discussion, then institutional investors appear to be very skilled at significantly increasing the return while dramatically decreasing the volatility of their portfolios.

The Bloomberg article mentioned above points out that Knuteson has been arguing, for almost a decade, that the overnight trading puzzle is widespread and stems from market manipulation. The Bloomberg article also mentions a recent publication in the Journal of Investment Management by Victor Haghani, Vladimir Ragulin and Richard Dewey. Their work, which received the Harry Markowitz Best JOIM Paper Award this year, provides an explanation for the phenomenon based on the trading of “meme stocks.”

The “meme stock” argument involves individual investors choosing stocks mostly when not at work and markets are closed, and placing trade orders to be executed at the open. In a rejoinder, Knuteson explains why he finds the meme stock explanation unconvincing. Indeed, he discusses a range of possible alternative explanations, and concludes that only manipulation can account for the full extent of the phenomenon.

Intraday Returns, Free Cash Flow, And Elon Musk

An interesting feature in the cumulative return chart above is the intraday time series. Notice that for the first year after Tesla’s IPO, the cumulative return declines from the initial $1 investment and then remain within a band between 20 cents and 51 cents. This feature is technically known as “long-term underperformance.” Then, in September 2019, the cumulative return rises dramatically, until November 2021, after which it falls dramatically.

The intraday cumulative return follows a typical pattern for IPOs, documented in the behavioral finance literature. In respect to the increase beginning in September 2019, I note that in July 2019, I wrote a blog post titled “Pay Attention to Elon Musk’s Statements About Tesla’s Free Cash Flow.” The post pointed out that Tesla “is now at the point of being self-funding," and his having said that he expects the firm to be “free cash flow positive in future quarters with the possible temporary exceptions around the launch and ramp of new product.” In respect to the decline in cumulative return beginning in 2021, notice from the first chart that Tesla’s (real) free cash flow fell in 2022, and then became negative in 2023 and 2024.

An important takeaway from the previous two paragraphs is that the intraday return pattern is generally in line with Tesla’s underlying free cash flow fundamentals. In this respect, the fundamentals do not support Tesla’s market capitalization, even after its 50% decline from the December peak. Therefore, it is the overnight returns that embody the overvaluation, and this has been the case throughout Tesla’s existence. The trades at the close and subsequent open have effectively prevented Tesla’s stock price from declining to its fundamental value. Instead, they have widened the price-fundamentals gap.

As for the overnight return pattern, notice from the chart that these cumulative returns do not exhibit the same long-term underperformance pattern as intraday returns. Indeed, standard close-to-close returns are dominated by overnight returns, not intraday returns.

Moreover, cumulative overnight returns suddenly begin to trend upwards in 2013. At this time, Tesla’s free cash flows were negative, with analysts forecasting that they would stay negative for most of the next decade. The contrast between the overnight and intraday series, between 2013 and 2019 is striking, until free cash flow turned positive in 2019. This was a period of major mispricing. As for the JPMorgan and Morgan Stanley analyst reports discussed above, these were from 2020.

Musk is the wealthiest individual in the world according to Forbes’ Real-Time Billionaires List, in large part because of Tesla’s market capitalization. Musk’s recent activities, especially at the Department of Government Efficiency, in large part stem from the power his wealth brings. It seems possible, if not likely, that much of that wealth stems from events related to overnight returns.

The overnight return issue is more than a curiosity. There is a compelling case to be made that because of Musk’s DOGE activities, it has had major implications for the U.S., as millions of Americans have been marching to protest DOGE activities, with the slogan “Hands Off.” As a result, it is especially intriguing that manipulation might source of the overnight/intraday returns pattern for Tesla’s stock price, given the significance of that stock for Musk’s wealth.

Issue Intersection, Psychology, And Incentives

The two issues, price-valuation gap and manipulation, come together in interesting ways. During regular trading hours, it is as if traders fully appreciate that Tesla’s stock price is overvalued relative to fundamentals. As a result, returns during trading hours are typically negative. Also, as mentioned above, the return standard deviations, both per hour and per session, are larger for intraday than overnight. This means that intraday trading features lower returns and higher volatility. In this respect, keep in mind that according to textbook theory, returns and risk should be positively correlated, not the reverse. This is one reason why behavioral finance, not traditional finance, is better at explaining the financial world.

The same two issues come together in respect to persistence of the phenomenon over time, psychological denial, and private interests. In respect to the price-valuation gap, for almost two decades, analysts have resisted the contention that their free cash flow-based valuations are upwardly biased. I have documented this issue in JOIM, in the Journal of Portfolio Management, and on my Forbes blog.

In respect to manipulation, Knuteson points out that the overnight return puzzle applies broadly, including to the S&P 500. In an email exchange with me, he reports the arithmetic means and standard deviations for each of the two S&P 500 SPDR ETF series, for the time period Jan. 29, 1993 through Mar. 31, 2025. These are respectively 0.04% (mean) and 0.67% (standard deviation) for overnight, and 0.005% (mean) and 0.96% (standard deviation) for intraday.

The difference in means, when compounded, are colossal. Knuteson asks why this phenomenon, which is stark, widespread, and documented, has gained such little attention from regulators, academics, and investors. The Bloomberg article applies the term “conspiracy theory” to the manipulation claim. In his rejoinder to the Bloomberg article, Knuteson makes the following remarks, where references to [8], [2022], and [2023] refer to his posts and other comments.

“By far the biggest conspiracy here is the years-long decision by regulators, other government officials, economists, journalists, finance industry professionals, and others to hide these strikingly suspicious return patterns and the apparent absence of any innocuous explanation for them from the public at large. This conspiracy is genuinely astounding. But it isn't a theory. It is an objective, indisputable fact. I have extensively documented it (including in the public thread with the SEC and others made available with [2023]). The years-long hiding of these strikingly suspicious return patterns from the public is a historic conspiracy regardless of what the correct explanation for these suspicious return patterns turns out to be. The aspect of this problem most deserving the term "conspiracy" is the indisputable fact that the public at large still (still!) has absolutely no idea these suspicious return patterns that nobody can innocuously explain even exist [8]. Of course, as I point out in [2023] and elsewhere, this well-documented, objectively factual, undisputed, still (still!) ongoing "conspiracy" requires no large, secret, sinister network -- just a bunch of people with bad incentives who lack the integrity to do the right thing.”

Cognitive dissonance, motivated reasoning, and the pressure to conform are powerful psychological forces that can prevent people from accepting the truth. Cognitive dissonance is about resolving conflicts in information by choosing what is most comfortable. Motivated reasoning is about rationalizing such a choice, when that comfort is connected to incentives. The pressure to conform is about the discomfort that comes from expressing dissent within a group.

Hyping stocks and overvaluation relative to fundamentals leads people to feel more comfortable than if stocks were fairly priced. Ignoring the price-valuation gap can be viewed as cognitive dissonance. Ignoring that the bulk of stock returns arrive in the dark of night is a form of motivated reasoning. As for the pressure to conform, Knuteson suggests the following about those working for firms engaged in the alleged manipulation.

“At some point, a quant who has been around long enough has acquired a sufficiently informed understanding of the group's activities to recognize the problem and its serious implications. Most quants at that point won't speak up -- social pressure, good pay, the plausible deniability afforded by willful blindness, and the absence of an obviously effective way to address the problem will together be more than enough to keep almost anyone quiet.”

The valuation of Tesla is fascinating, and in respect to psychological forces at work, it is just the tip of the iceberg.