Few companies have achieved the global renown that Tesla (NYSE: TSLA) has achieved in only thirteen short years since its founding. The company's prominence is due in part to the celebrity of its CEO, Elon Musk, and partly to the company's revolutionary goal of becoming a "car manufacturer that is also a technology company". The company, founded as Tesla Motors in 2007, saw its IPO in June 2010 when Tesla’s stock price was only $17. At the time of publication, Tesla stock is trading well above $800 per share. Tesla has earned its IPO investors a total return of 4,759 percent: an average annualized return of 44.75 percent.
Tesla bulls expect that this upwards trend will continue in the next decade of trading. This article will examine whether the bulls are justified in their expectations and examine the prospects of some other car manufacturers, including both electric vehicle (EV) and combustion engine companies.
The Bullish Case for EV Companies & Tesla
As Joe Biden assumes the Presidency and Democrats take control of both houses of Congress, significant changes are expected to environmental policy in the U.S. President-Elect Biden's pick for energy secretary is Jennifer Granholm, the former governor of the state of Michigan, which is the country's auto manufacturing capitol. As governor, Granholm secured $1.35 billion in funding for the development of electric cars and batteries in Michigan. She is now expected to take this mission further by helping Biden make the U.S. competitive with China in the EV space. Biden has pledged to build 550,000 EV charging stations and to create over 1 million jobs in the clean energy space during his tenure. Biden is also likely to continue tax breaks on EV purchases. What does all this mean for US-based EV companies?
From a purely fundamental standpoint, it stands to reason that U.S. EV companies, Tesla included, will benefit from upcoming clean energy legislation, and will see an increase in incentives which will lead to more sales, which should boost the Tesla stock price. In fact, EV sales make up about 3% of total auto sales today, but this number is expected to jump to 10% by 2025.
Additionally, while Tesla delivered 499,550 vehicles in 2020, which includes deliveries not just of existing Tesla models, but also of electric trucks and a more affordable ($25,000) car that has not yet been unveiled. Tesla bulls argue that if these expansions to come to fruition, even partially, the valuation of the company and its stock price will continue to skyrocket over the coming years. If this analysis is correct, it is not too late to buy Tesla stock. In fact, Elon Musk has said that he expects the company to deliver 20 million vehicles annually over the next decade. One of the best-known long-term Tesla bears, Adam Jonas of Morgan Stanley, predicted a Tesla stock price as low as $250 per share in December 2019, but has recently changed his tune – he now holds a Tesla stock price forecast of $810 per share.
Finally, many stock analysts argue that since Tesla was included within the S&P 500 Index on December 21, 2020, mutual funds and index trackers have been required to purchase the stock to rebalance their holdings. Historically, companies joining the index have tended to enjoy a short-term boost in their stock prices.
The Bearish Case for EV Companies & Tesla
Despite Musk's impressive vision for Tesla’s future product production stream, critics argue that he has a track record of failing to meet deadlines and that these failures often have a detrimental impact upon Tesla’s stock price. In fact, Musk himself said in the company's Q1 2020 conference call that “Punctuality is not my strong suit, but I always come through in the end.”
Tesla's stock price is perhaps more vulnerable to sudden falls than other stock prices because of Elon Musk's volatile personality and his tendency to make surprising and newsworthy public comments. For example, in May 2020, Musk tweeted that Tesla's stock price was "too high", sending Tesla shares down 12% within a half hour and wiping out $14 billion of the company's value. The stock has, of course, rebounded and surged to new highs since then.
A slew of competitors in the EV space may also detract some attention from Tesla. There are several Chinese EV producers who have been dubbed as serious Tesla competitors lately, including Nio (NYSE: NIO), Li Auto (NASDAQ: LI), and XPeng (NYSE: XPEV), all of which stand to benefit from the same forces that are driving Tesla stock prices higher, including environmentally friendly regulation and the potential for ending (or, at the very least, cooling) the US-Sino trade war once President-Elect Biden takes office. The fact that China is the world's largest producer of new vehicles can also help China-based manufacturers.
Is Tesla Overvalued?
Perhaps the strongest argument Tesla bears have is that the current Tesla stock price gives the company a fundamentally unreasonable overvaluation. In 2020, Tesla delivered just under 500,000 cars, but the stock price values the company at some $750 billion. General Motors (NYSE: GM), a company founded a full century before Tesla, delivered 2.5 million vehicles in 2020, but the company's valuation is only $62 billion. Furthermore, Tesla's price-to-earnings ratio is nearly 128x, while the industry standard remains a respectable 15x. In other words, based on research conducted by Zacks Investment Research, it will take Tesla 1,600 years to generate the revenue stream that the current stock price implies the company should have. Bearish logic would dictate, therefore, that you should not buy Tesla stock online at the current price, as the valuation is too high.
Bottom Line
I see the bullish case for Tesla as more convincing than the bearish case. If you are convinced by the bullish case, the question remains as to whether it is a good idea to invest in Tesla now or wait for its price to fall to some extent. This is a difficult question to answer, for it depends heavily on what type of investor you want to be, and what your profit time frame goals are. If you are looking for a quick gain, Tesla may be an excellent stock choice because its stock price tends to fluctuate more dramatically per day than most other stocks. However, you may also be vulnerable to steep losses if the market does not swing your way. What is your risk tolerance? Are you willing to ride out the downturns or will losses devastate your account? Ask yourself these questions before deciding whether you should buy Tesla now or wait.
There are a few things Tesla has going for it that other companies do not currently have:
- Tesla is likely to remain a fashionable choice for car buyers, even as other companies emerge with competitive EV options.
- Tesla's reputation as an innovative, disruptive technology company, not just a car manufacturer, is likely to keep the company surprising shareholders and consumers in a positive way for years to come.
- The company produced nearly 180,000 vehicles in Q4 2020, which equates to an annual run rate of 719,000 vehicles, if all remains stable. However, we know that Tesla is planning to open new factories in Texas and Berlin in the coming weeks, which will allow the company to continually expand its production rate. Additional production capacity for the Tesla Model Y in Shanghai can also improve the company's production numbers.
- As a relatively new company, Tesla has a fair way to go in terms of optimizing its operating procedures and cutting costs which can have a dramatic positive impact on the company's overall profits in 2021 and beyond. If Tesla can, in fact, raise deliveries by 60 percent this year, as many analysts expect, it could certainly see significant earnings growth, especially if it continues to maintain decent profit margins.
There is no question that investors willing to take risks have the possibility of gaining tremendous rewards. Those who invested in Apple stock ten years ago, when the iPhone was a brand-new concept, have seen an approximate gain of 1200 percent, or nearly 30 percent per year. Tesla's supporters have felt similarly optimistic about the company's offerings and its potential to revolutionize the EV industry – and more. In fact, there are many "teslanaires" that were created recently thanks to the fact that Tesla's stock price surged 700 percent in 2020. With Tesla currently capturing only 1 percent of the US automobile market, few would argue that it has lots of room for further growth. Many analysts try to provide Tesla stock predictions, and even the most bullish Tesla supporters agree that another 700 percent surge in the company's stock price is unlikely, though many agree that the company will continue to outperform the S&P 500 Index and create opportunities for those willing to take the risk.