Could electrifying sales boost Tesla’s share price higher?

Tesla [TSLA] was a juggernaut last year, soaring through repeated all-time highs, and it has continued its unrelenting surge into the start of 2021. Year-to-date, Tesla’s share price has risen 24.8% from $705.67 at the end of 2020 to $880.80 at close on 25 January, hitting an intraday all-time high of $900.40 the same day.

The stock has gained a phenomenal 1,156% from its 52-week low of $70.10, hit on 18 March last year.

Auto stocks are turbocharged by the frenzy around electric vehicles and innovative battery technologies, driven in part by retail investors and the arrival of several Chinese electric vehicle (EV) stars — including Li Auto [LI], Nio [NIO] and Xpeng [XPEV] — onto the US stock markets.

The company is due to report its fourth-quarter earnings on 27 January.  Investors will be keen to see how the company’s earnings help Tesla’s share price and what effect this has on the wider EV space.

On the up

Despite the increasingly fierce competition, Tesla sales have remained strong. In early January, Tesla reported having delivered 180,570 vehicles in Q4 2020, up from 139,300 delivered in the three months to the end of September. The company missed its target of 500,000 deliveries for the full fiscal year by just 450 units.

Daniel Ives, analyst with Wedbush Securities, thinks Tesla’s strength in sales was underpinned by sustained demand in China, despite competition from local rivals. Ives described China as the “star of the show” in an October note to clients, released ahead of Q3 earnings and seen by Benzinga.

Tesla slashed the price of its China-made Model 3 sedans in October by circa 5% and news reports suggested that the cheaper model is likely to be manufactured with more affordable battery technology.

In the three months to the end of September, Tesla recorded its fifth consecutive quarterly profit. Revenue was up 39.1% year-over-year from $6.303bn to $8.77bn. Earnings per share were $0.76. These figures surpassed analysts’ expectations of $8.36bn and earnings per share $0.57, respectively.

Capital expenses grew 84% year-over-year to just over $1bn as the electric carmaker grew its production at facilities in the US, Europe and China — the new Model Y is being produced at its Shanghai factory. During the Q3 earnings call, the company forecast that capital spending would be $2.5bn in 2022, as it continues to ramp up vehicle production at home and abroad, as well as proceeding with battery cell manufacture.

While Tesla didn’t issue any guidance for Q4 earnings, analysts are expecting revenue to be between $9.10bn and $10.74bn, according to Zacks. The consensus of $10.15bn represents year-over-year growth of 37.5% from the $7.38bn posted in Q4 2019. Earnings per share are expected to be between $0.46 and $1.18.

Driving forwards

One thing investors will be looking for is an update on 2021 car sales targets. On the Q3 earnings call, Pierre Ferragu, analyst with New Street Research, said he expected the company to deliver between 840,000 and one million vehicles in fiscal 2021. Elon Musk, CEO of Tesla, said it would be “in that vicinity”. Positive signs on sales include reports that the Q1 supply of the Model Y SUV in China sold out within days of orders being taken.

Throughout 2021, investors will be keeping a close eye on the carmaker’s product pipeline, whether that’s the release of new models or new battery technology.

Cost reduction related to battery technology is “critical to realising positive incremental operating margin and cash flow necessary to support sustainable profitability,” Colin Rusch, analyst at Oppenheimer, wrote in a bullish note seen by MarketWatch.

He was not concerned over the pace of Tesla’s share price growth, more than doubling his price target from $486 to $1,036 and reiterating an outperform rating. “We believe [Tesla] has the potential to be a transformational technology company and deliver outsized returns,” he said.

“We believe [Tesla] has the potential to be a transformational technology company and deliver outsized returns” - Colin Rusch, analyst at Oppenheimer

However, Rusch was slightly concerned by Tesla’s dismissal of self-driving light detecting and ranging (LiDAR) technology in favour of its own sensors and software. Musk previously told analyst Adam Jones of Morgan Stanley: “I think even if [LiDAR] was free, we wouldn’t put it on.”

Nonetheless, “the learning cycles enabled by having [more than] one million vehicles on the road is an extraordinary advantage,” Rusch added.

With both Nio and Xpeng embracing LiDAR, and Intel [INTC] subsidiary Mobileye scaling up its autonomous driving program, Tesla is by no means guaranteed to win the self-driving vehicle race.