Following Tesla’s fourth-quarter earnings announcement in which it announced revenue beats, shares dropped after hours trading. However, earnings missed the mark.
California-based electric vehicle maker Palo Alto is a clean energy company that specializes in the production, sale, and development of fully electric vehicles. They also offer vehicle service centers, supercharger station, and cars with ever increasing self-driving capability.
TSLA shares grew almost 700% during 2020. Investors might wonder if this massive run-up was followed by a disappointing earnings report. Consider all the pros and disadvantages before making a final decision.
Tesla at a glance
Pros and cons of buying.
Pros and cons of purchasing
Let’s be clear: Should you invest in Tesla stock?
Tesla at a Glance
Tesla went public on October 10, 2010, offering 13.3 Million shares at $17 per Share. At the time this writing, shares were trading at $830 per piece.
Although that is an impressive return, it has been a bumpy road. The company has missed manufacturing deadlines, Elon Musk’s controversial comments, and a steady stream reputable traders have criticized the company’s value and suggested shorting the stock.
Tesla is the world’s largest automaker, with a market capitalization around $800billion. This is more than Toyota Motor Corp. TM, Honda Motor Co. HMC (HMC) or General Motors Co. GM (GM). While all of these companies followed Tesla’s lead to produce their own electric and zero-emission cars, Tesla continues to dominate the U.S. marketplace.
Although a 77% increase in share price may seem enough for most companies to be considered a success, Tesla’s inclusion in S&P 500 on 21 December was the highlight of 2020. It had been a long-awaited event for Tesla. However, the S&P Dow Jones Indices kept Tesla & its shareholders waiting despite the fact that the company had reported four straight quarters with profitability necessary for inclusion in the index.
Now, where is Tesla today following its first earnings report as a S&P 500 member?
The company announced fourth quarter earnings on Jan. 27 after the bell. There were mixed results. Total revenue increased 46% year over another to $10.74 trillion. Earnings per Share of 24 Cents was an 118% increase on the same period last year. But, after accounting for one-time items Tesla earned 80c per shares. Although it was still lower than $1.03/share that analysts expected, shareholders should not be surprised to learn that this was Tesla’s sixth consecutive quarter of profit.
Pros and Cons of Buying Tesla Stock
Tesla’s latest earnings report highlighted a record amount of production and deliveries as one of its greatest strengths. Tesla produced 179.757 vehicles during the fourth quarter. This represents a 71% improvement over the quarter last year, and is well above the 145.036 vehicles that Tesla made in the quarter before. Tesla delivered 180 667 vehicles, a 61% rise year-over–year, to new homes.
Tesla had ambitiously set the goal of delivering 500,000 vehicles by year’s end. The company delivered 499,647 vehicles in 2020, despite the interruptions from pandemic-related production lines. Tesla’s management team promises a 50% increase in deliveries annually over the next years.
So where are all those new cars going?
Tesla’s Fremont factory in California is undergoing an increase in production. In the last few weeks, the company upgraded the factory to produce the Model S (and Model X) as well the Model 3 & Model Y. The Model 3 is currently being produced at the Gigafactory Shanghai. Model Y production has begun in late 2020.
Tesla reported in the most recent earnings report that it is still building its factories in Berlin and Austin. The machinery has also been moving into the Berlin location. The Tesla Semi and Tesla Cybertruck are scheduled to be released in 2021, 2022, respectively.
Another sign that operations have improved is the free cash flow. This was positive for the second straight year. Tesla reached the finish line in 2020 with a record $1.9billion of free cash flow. The company’s 2020 free cash flow was $2.79billion, which is more than double the $1.08billion that it received in 2019.
A combination of more vehicles being produced and improved financials is impressive. Tesla is performing well and macro trends are also favoring it.
Bullish investors look long-term and place their hopes in fully autonomous vehicles. Although there are many companies working in that direction, Tesla’s lead makes it difficult to surpass. Tesla vehicles can now be driven by their own cameras, radars and GPS thanks to years of progress in the use of cameras, GPS and radar. This opens the doors to other growth opportunities: Musk discussed the possibility of self-driving Teslas used as robotaxis during the earnings calls. For Musk and Tesla it would be a great, futuristic idea.
Tesla now has more opportunities because of President Joe Biden’s victory in November, and the Democratic control over Congress. Companies that use green technology, and are emission-free, will reap the benefits of tax credits. Although these rewards are not yet tangible, President Biden has ambitious plans to combat climate changes. There will be many opportunities for Tesla in the future.
Cons of buying Tesla Stock
Tesla’s greatest asset is also its largest threat: Elon Musso.
Hesitant shareholders will quote tweet after tweet of the CEO’s abusive rhetoric. Musk tweeted in August 2018 that “he is considering taking Tesla private at $420.”
In settlement of his suit against the U.S. Securities and Exchange Commission (USSEC), Musk was forced to resign from his post as chairman. Musk, not fazed, single-handedly took billions off Tesla’s stock value earlier in the year by tweeting, “Tesla stock market price is too high imo.”
Tesla wouldn’t be worth as much today if Musk were not there. But his immense status highlights the key-man risk that the company and its stock market are subject to. Tesla shares will undoubtedly be hurt if Musk ever leaves to devote himself to SpaceX work, or is terminated for his bad behavior. Perhaps the worse outcome for Tesla shareholders, though, would be if the former SpaceX CEO stayed.
Tesla, however, is facing larger problems across the globe. It isn’t the only player in the electric-vehicle market.
The world’s largest and most innovative electric vehicles are now available to everyone.
This means that American companies like Ford (F), have invested heavily into startups like Rivian. While GM is launching a remarkable 30 new EVs by 2020, it’s a very impressive feat. Many of Tesla’s bull claims are based in China, where EV producers Nio (NIO), Li Auto and XPeng are gaining market share.
Tesla may have grown its share of America’s EV market to approximately 80% in 2020. However, it must be remembered that Tesla is having difficulty selling EVs elsewhere. China’s EV market is so competitive that Tesla has had to reduce prices multiple times by 2020. Tesla’s Chinese EVs have had their monthly registrations well below capacity. The company will continue exporting EVs made in China to European markets until the Berlin Gigafactory has been completed.
The Bottom Line: Should Tesla Stock Be Purchased?
As the company becomes more profitable, it appears that the ride for shareholders is smoothing out. Tesla’s high valuation multiples cannot be ignored by investors. The company has a market capital of nearly $800bn, despite reporting $31.5billion in total revenue for 2020.
Tesla has become the world’s largest automaker and is currently the market leader. If things continue to go Tesla’s ways, that’s unlikely to change anytime in the near future. And if history is any indication, it’s a bad bet to wager against Musk. You can see Tesla stock prediction 2025 at stockforecast.com.
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