Tesla stock rose 695% in 2020. Is this a purchase for 2021?


TeslaOf (NASDAQ: TSLA) The stock is incredibly 695% in 2020, making it one of the world’s most valuable companies with a valuation of $ 630 billion. Investors have bought Elon Musk’s product lineup, growth story, self-driving technology and manufacturing expansion plans. Nevertheless, there are questions facing the stock in 2021.

By any traditional measure, Tesla’s assessment seems insane. The company is valued at 24 times sales and has a price-to-income ratio of 1,332, despite the regulatory credit sales producing billions that are not core operations. So is the stock going up, or is there a higher valuation than what investors should be negotiating right now?

Image Source: Tesla

Tesla’s model is working

Elon Musk has always argued that Tesla can generate better margins than traditional vehicle manufacturers, which could put dealers out of the equation and keep low production costs through simple electric vehicle designs. So far, that model is proving to be correct.

Tesla’s revenue has skyrocketed over the past five years, and it is generating more than 20% gross margins on a regular basis, which is near the top of the auto industry.

TSLA Revenue (TTM) Chart

TSLA Revenue (TTM) data by YLharts

Even more impressive is that Tesla has maintained strong margins as it has reduced the average selling price of vehicles. The company clearly has a cost structure that competitors have not caught up to, and with self-driving such ominations in the market now, there may be opportunities to increase margins even more.

Is the Tesla Building too big, too fast?

Tesla’s production is expected to reach around 500,000 units in 2020 and could grow rapidly over the next few years. Giga Shanghai is already up and running, and Giga Berlin is expected to start production in mid-2021, bringing Tesla’s production capacity to more than 1 million vehicles per year.

At the same time Tesla is expanding, competitors are building their EV capacity. NIO (NYSE: NIO) Today is expecting to increase its own production capacity by about 60,000 vehicles per year by the end of 2021. Volkswagen Its new China factory has a capacity to produce 300,000 electric vehicles and says it will be able to produce 1.5 million EVs annually by 2023. General Motors (NYSE: GM) It has not set near-term production targets, but it plans to invest $ 27 billion in EVs and autonomous driving between now and 2025. This one tops them all Nissan, BYD, Hyundai, Rivian, fisher, Bmw And many others are investing in electric vehicles that have not yet come on the market. As they do, Tesla will compete in a way not seen before, which can affect both volume and pricing.

Competition can be a problem for Tesla, as it struggles to make money despite selling every vehicle it can possibly produce. There is a lot of operating leverage in the auto business, so any decrease in usage or decrease in price will have a big impact on the bottom line. Right now, investors expect sales volumes to grow rapidly and prices (ie, margins) to remain high – so any change in that thesis could reduce the stock.

Autonomy is a force that can become a weakness

Today, Tesla looks like a leader in autonomous driving. It is charging an additional $ 10,000 per vehicle for its “self-driving” autopilot software, which actually has limited self-driving capabilities. Tesla believes that investors will be able to generate margin like software from such products, the price may be higher. But there is reason to think that Tesla is grabbing easy cash from early adopters, ignoring the real disruption in autonomous driving.

The most advanced autonomous driving technology is being built by companies such as GM-owned Cruise and AlphabetOf (NASDAQ: GOOG) (NASDAQ: GOOGLE) Waymo, which has already put millions of miles on the road in fully autonomous mode. And they are creating business models that will enable low-cost autonomous ride-sharing in cities around the world.

As Tesla builds capacity, Cruise and Waymo are building business models that fully enhance the idea of ​​vehicle ownership. No matter how you look at it, autonomous driving is coming, but it may not be good news for Tesla, if its software-as-a-service service model transcends autonomous ride-sharing which is much less The up-front-cost provides “transportation as a service” business model.

Buying Tesla shares today?

I can’t back down from Tesla at this price. The company’s growth is impressive, and it has been proven that electric vehicles can be a viable product long term. But without regulatory credit, the company is still not profitable.

Meanwhile, more than a dozen contestants are preparing EV offerings that will hit the market in the next few years. The competition will be more compelling than anything Tesla has faced in the past, and this could mean not only less demand for Tesla’s cars, but also less regulatory credit required by competitors.

Given all the pressure that Tesla is getting in the way, I don’t think next year will be good for the stock. This is definitely not an auto stock that I will buy after the incredible run of 2020.

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