Tesla delivered a record 180,570 cars in the fourth quarter of 2020 taking its full-year deliveries to 499,550. The company created several records in the year but would these be enough to justify the rally in its stock?
To be sure, while Tesla missed half a million deliveries that it was targeting for 2020, its total car deliveries in the year look impressive. This holds especially true given the headwinds this year from the COVID-19 pandemic. The company’s Freemont plant, where most of its cars are made, was shut for many days due to shelter at home orders. Its China plant was also shut for a few days due to the pandemic.
Tesla stock made a record
Tesla’s stock rose 740% in 2020 and it was the best performing stock in the index last year. Tesla was also the best performing stock in Nasdaq. Apart from electric vehicle makers like Tesla, NIO, and XPeng Auto, stay-at-home stocks that include Amazon, Netflix, and Zoom Video Communications were among the other top gainers in the year.
Stay at home stocks outperformed in 2020
Apple was the best performing FAANG stock in 2020, for the second consecutive year in a row. Gene Muster, the co-founder of Loup Ventures, expects Apple to be the best performing FAANG stock in 2021 also. He had predicted that Apple’s market capitalization would cross $2 trillion in 2020. Now, he is forecasting the company’s market capitalization to hit $3 trillion.
Incidentally, Apple is also working on an electric car project in an internal project codenamed “Titan.” While few details are known about the project—including whether Apple would go for in-house or third-party manufacturing—it could be the biggest challenge for Tesla.
Tesla’s deliveries hit a record high
Tesla’s total car deliveries increased by 36% last year. In 2019 and 2018, Tesla’s car deliveries had increased by 49% and 142% respectively. The sharp increase in 2018 deliveries, where Tesla’s car deliveries more than doubled was due to the launch of its mass-market Model 3. Model 3 gave Tesla the scale that the higher-priced Model S and Model X could not.
The general belief is that the Model S and Model X carry a higher margin than the lower-priced Model 3 and Model Y. However, despite the falling share of Model S/X in Tesla’s total product mix, it has posted a net profit for five consecutive quarters. This includes the first and second quarter of 2020 that was challenging for the company due to seasonal slowdown and the closure of its Freemont plant respectively.
Tesla reaches economies of scale
Tesla has managed to post profits through production efficiencies driven from the economies of scale. It has also relentlessly focused on cutting costs. Also, the sale of carbon credits to rival automakers has been a key driver of Tesla’s profitability. Despite all that, its net profit margin has been around 1% over the last 12 months.
Also, while Tesla delivered almost half a million cars in 2020, the growth rates have gradually come down over the last three years. As Tesla reaches a critical mass, it would find it difficult to double its deliveries every year as it did in some years in its history.
New products could be the savior for Tesla
For Tesla, the launch of new products and entry into new markets has been a key driver of rising deliveries. There have been reports of Tesla’s growth rates sagging in markets like the US and Europe where it has been well entrenched. However, soaring sales in China have helped buoy the overall deliveries.
Analysts have been apprehensive over Tesla’s valuation for over a year now. However, given its popularity among Robinhood traders and Elon Musk fans, the stock has continued to rally. It’s tough to build a case for Tesla’s valuation with its market capitalization now approaching $700 billion. But then, some analysts have been sounding an alarm ever since the company’s market capitalization soared above $100 billion.
Some analysts like Ryan Brinkman of JP Morgan, expect Tesla stock to fall almost 90% to $90. Even Dan Ives of Wedbush Securities, who has been among the most notable bulls on electric vehicle names, is neutral on the stock and has a base case price target of $715. However, Ives has a bull case price target of $1,000 on Tesla shares.
Electric vehicle demand is rising
“Heading into year-end and 2021, we are seeing a major inflection of EV demand globally with our expectations that EV vehicles ramp from ~3% of total auto sales today to 10% by 2025,” said Ives. He added, “We believe this demand dynamic will disproportionately benefit the clear EV category leader Tesla over the next few years especially in the key China region which we believe could represent ~40% of its EV deliveries by 2022 given the current brisk pace of sales.”
While electric vehicle sales are expected to rise sharply over the next decade, the valuations of electric vehicle stocks have surged to astronomical levels. Looking at the expected competitive rivalry among pure-play electric vehicle makers and legacy automakers who have planned multiple electric models over the next two years, the markets are ignoring the risks of pricing pressure.
Notably, Tesla has been gradually lowering prices to pass on the savings from lower battery costs and economies of scale to buyers.
Shorting Tesla has been suicidal
Shorting Tesla has been suicidal and even long-term Tesla bear Jim Chanos admitted last month that he has trimmed his short positions on the stock calling it “painful.” Tesla’s short-sellers lost $38 billion last year betting against the Elon Musk-led company.
In the short to medium term, investor euphoria can keep Tesla stock going. However, over the long term, it would need to justify the valuations with commensurate earnings.