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  • Stock Deconstruction
  • disruptive innovation
  • electric vehicles

Has Tesla’s share price reached its peak?

In the week commencing 4 January, Elon Musk, CEO of Tesla, was temporarily declared the richest person in the world, overtaking Jeff Bezos, CEO of Amazon. This was all down to Tesla’s [TSLA] share price and its remarkable, relentless rally in 2020.

From a closing price of $83.67 on 31 December 2019 through to $705.67 on 31 December 2020, Tesla’s share price rose 743.4% last year, and ended 906.7% above its 52-week low of $70.10, to which it dropped on 18 March, in the midst of the coronavirus-induced market selloff.

Since the start of 2021, Tesla’s share price has kept on rising and has climbed 17.1% in January so far (as of close on 15 January). This is a 6.6% decline on its all-time high of $884.49, recorded during trading on 8 January. 

Despite the pandemic leading to a slump in production in the automotive industry early last year, Tesla has delivered a profit in the last five quarters. In the third quarter of 2020, the company reported revenue of $8.77bn, up 39% year-over-year on $6.30bn and setting a record for quarterly revenue. Earnings per share were $0.76. These figures surpassed analysts’ expectations of $8.36bn and earnings per share of $0.57, according to Refinitiv data.

Key to the record quarter was a large uptick in vehicles delivered. For the three months to the end of September, the company delivered 139,300 units, up 43.6% on the 97,000 deliveries in Q3 2019. It also reported $397m in revenue from environmental regulatory credits to other automakers, up 196% on the $134m reported in the year-ago quarter.  

 

Delivering the goods

For the three months to the end of December, Tesla reported delivering 180,570 vehicles, up 61.2% on the 112,000 delivered in Q4 2019, and a 29.0% increase on the previous quarter. It meant the company missed its original target of half a million deliveries in 2020 by just 450 units. 

Whether Tesla’s share price rally can continue through 2021 will largely depend on its ability to continue delivering more vehicles quarter-over-quarter — especially its popular Model Y — combined with an increase in its Shanghai production capabilities and sales across China.

According to Dan Ives, analyst with Wedbush Securities, Tesla can become a clear leader in the EV market in China — despite competition from Li Auto [LI], Nio [NIO], and Xpeng [XPEV].

In a note to clients seen by Fortune, Ives wrote that electric vehicle (EV) sales could account for 10% of total automotive sales globally by 2025, up from 3% in 2020, and Tesla is primed to make up to 40% of its EV sales in China by 2022, up from 15% currently. 

At the end of last year, Ives maintained his neutral rating for the stock, but raised his price target from $500 to $560. On 12 January, Ives said he believed that Tesla was on its way to becoming a $2trn company, and could sell up to 800,000 units this year, according to a report from Benzinga.

 

$2trillion

Dan Ives prediction for Tesla's future valuation

 

On 11 January, Bank of America analysts raised their price target on Tesla from $500 to $900, praising “solid” Q4 sales.

Analysts at Evercore ISI, who had been bearish on Tesla for a long time, admitted in a note to clients released on 8 January and seen by MarketWatch that they had been “on the considerably wrong side of [Tesla]”.

The analysts went on to explain that they had simply viewed the company as “a growth and premium auto” stock for the last five years, albeit an attractive one. They believed the company could go on to “grow for a very long time”, shifting more and more vehicles year-over-year but, at the end of the day, it was still just an automotive manufacturer.

They’ve now changed their stance. “In reality — hindsight & rationalisation, never predicted — we believe tech and retail investors see [Tesla] as two separate tech companies,” they wrote. One being an EV company and the other a leader in battery, powertrain and solar power storage technologies.

 

"we believe tech and retail investors see [Tesla] as two separate tech companies" - Evercore ISI analysts

 

The analysts also stressed that Tesla was in a good position to reap the rewards of any clean energy and manufacturing policies that US president-elect Joe Biden might introduce, especially as part of his "Build Back Better" plan.

 

In the blue-chip club

The company will undoubtedly be boosted in the long-term by having joined the S&P 500 on 21 December after it was overlooked in the previous quarter in favour of Etsy [ETSY]. Its inclusion will elevate it to blue-chip status and could push the stock to new highs. However, the frothiness of the EV industry in general is a potential headwind that must be considered. 

Vitali Kalesnik, partner and head of research in Europe at Research Affiliates, takes a more pessimistic view on the stock. In an interview with CNBC’s Squawk Box Europe, he argued that the recent price movement of Tesla indicates a bubble.

“While Tesla is a great company, [the] stock has very strong signs of being overpriced,” he told the network. “When we’re looking at the types of assumptions we need to justify these valuations, one would need very, very aggressive assumptions.

“When it’s included into the S&P 500, investors have to buy it at a very high price, and that is likely to produce pretty bad consequences [for] the investors.”

Tesla currently has 33 Wall Street ratings available, according to MarketBeat data. Eight are buy, 13 hold, and 12 sell. The consensus price target is $311.75, which is 62.3% below its closing price on 15 January. Some would argue this is a sure sign that the stock is currently overheated. 

 

Market cap $793.4bn
PE ratio (TTM) 1,600.39
EPS (TTM) 0.52
Quarterly revenue growth (YoY) 39.20%

Tesla's share price vitals, Yahoo Finance, 19 January 2021

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