Tesla (ticker: TSLA) posted its first full year of profitability for 2020.
Following the company’s fourth-quarter earnings announcement, shares slipped during after-hours trading on the news that Tesla beat revenue expectations but missed on earnings.
The Palo Alto, California-based electric vehicle maker and clean energy company specializes in the development, manufacturing and sale of fully electric vehicles (EVs) — providing vehicle service centers, supercharger stations and cars with ever-improving self-driving capabilities — along with solar energy generation and battery systems.
During the course of 2020, TSLA shares rose nearly 700%. But with this big run-up followed by an earnings miss, many investors might be wondering: “Is now the time to buy TSLA stock?” Before you make a decision, consider the pros and cons.
— Tesla at a glance.
— Pros of buying.
— Cons of buying.
— The bottom line: Should you buy Tesla stock?
Tesla at a Glance
Tesla went public in 2010, offering 13.3 million shares at $17 per share. At the time of this writing, shares are trading for more than $830 per share.
While that’s an impressive return on investment, it has been a volatile road to this point, marked by a history of missed manufacturing deadlines, controversial comments from CEO Elon Musk and a steady stream of reputable traders who denounce the company’s valuation and recommend shorting the stock.
With a market capitalization of around $800 billion, Tesla is the world’s largest automaker by value — larger than Toyota Motor Corp. ( TM), Honda Motor Co. ( HMC) and General Motors Co. ( GM) combined. All of these companies took their cue from Tesla and manufacture their own electric and low-emission automobiles, but Tesla continues to be the dominant name in the U.S. market.
While a nearly 700% increase in share price might be enough for most companies, the highlight of 2020 was Tesla’s inclusion in the S&P 500 on Dec. 21. It had been a long time coming for Tesla, and the S&P Dow Jones Indices kept Tesla and its shareholders waiting even after the company had reported the four straight quarters of profitability required for inclusion in the index.
So where does Tesla stand today after its first earnings report as a member of the S&P 500?
The company announced fourth-quarter earnings after the bell on Jan. 27, with mixed results. Total revenue grew 46% year over year to about $10.74 billion and earnings per share of 24 cents represented a 118% increase over the same period in the prior year — though when adjusted for one-time items, Tesla earned 80 cents per share. That was still below the $1.03 per share expected by analysts, though shareholders should nevertheless be pleased to note that this was Tesla’s sixth-straight quarterly profit.
Pros of Buying Tesla Stock
One of the biggest bright spots in Tesla’s most recent earnings report was a record number of both production and deliveries. In the fourth quarter, Tesla produced 179,757 vehicles, an impressive 71% increase from the same quarter last year and well more than the 145,036 vehicles Tesla built in the third quarter. As for deliveries, Tesla found 180,667 vehicles a brand new home — a 61% year-over-year increase.
Tesla had set an ambitious goal of 500,000 vehicles delivered by the end of the year. Even with pandemic-related disruptions on its production lines , the company came incredibly close, delivering 499,647 over the course of 2020. The management team at Tesla believes it can improve on that, promising 50% average annual growth in deliveries over the coming years.
So where are all of those new cars going to come from?
Production at Tesla’s Fremont, California facility continues to ramp up, with the company upgrading the factory over the last few weeks so that it can produce the more expensive Model S and Model X in addition to the Model 3 and Model Y. The Gigafactory Shanghai currently produces the Model 3, while Model Y production began in late 2020 and will grow over the coming year.
As for its newest facilities, Tesla noted in the latest earnings report that construction of the factories in Berlin and Austin, Texas continues, and machinery has begun to be moved into the Berlin location. The company plans to use the facility in Austin as the main factory for the Tesla Semi and the Tesla Cybertruck, anticipated for release in 2021 and 2022, respectively.
Another sign of improving operations was free cash flow, which remained positive for the second year in a row. Free cash flow hit $2.79 billion in 2020, more than double the $1.08 billion that the company collected in 2019, with a record $1.9 billion in free cash flow during the fourth quarter helping Tesla across the finish line.
More vehicles rolling off the assembly line and improving financials is an impressive combination. And while the company itself is executing well, macro trends also seem to be favoring Tesla at the moment.
Looking over the long term, bullish investors place their hopes on fully autonomous vehicles. Dozens of companies are working toward that end in one way or another, but Tesla’s lead is difficult to surmount. Tesla’s use of cameras, radar and GPS have been advancing for years to the point that Tesla vehicles are practically self-driving. This opens the door for other avenues of growth as well: During the earnings call, Musk discussed self-driving Teslas being used as robo-taxis. From anyone else that would be a fantastic, futuristic idea — for Musk and Tesla, it’s a distinct possibility.
Finally, with President Joe Biden’s November victory combined with Democratic control of Congress comes bigger opportunities for Tesla. Companies that focus on green and emission-free technology will reap the rewards of tax credits for consumers and manufacturers alike. While those rewards have yet to manifest themselves, President Biden’s ambitious plans to combat climate change point toward plenty of future opportunities for Tesla.
Cons of Buying Tesla Stock
Tesla’s greatest asset is also its biggest threat: Elon Musk.
Hesitant investors will cite tweet after tweet of problematic rhetoric from the company’s CEO. Perhaps the most infamous example occurred in early August 2018 when Musk tweeted that he was “considering taking Tesla private at $420.”
After this incident, Musk was forced to step down as chairman of the board in settlement of his suit with the U.S. Securities and Exchange Commission. Unfazed, Musk single-handedly knocked billions off Tesla’s market value earlier last year by tweeting, “Tesla stock price is too high imo.”
To be clear, Tesla wouldn’t be worth nearly as much as it is today if Musk weren’t around — but his colossal status signals the key-man risk attached to the company and its stock price. If he ever departed the company to focus on his work at SpaceX, or was simply terminated for his behavior, Tesla shares would undoubtedly suffer — though perhaps the only worse fate for Tesla shareholders is if he sticks around.
Meanwhile, Tesla faces larger problems around the globe: namely, it is no longer the only name in the electric vehicle game.
Electric vehicles, autonomous automobiles, cross-country networks of charging stations — where once Tesla stood alone proudly toting these concepts, today every automaker in the world has set their sights on becoming the biggest and best EV company on the planet.
Here in the U.S., that means companies such as Ford ( F) have invested heavily in startups such as Rivian, while GM is rolling out an impressive 30 new EVs by 2025. A lot of the bull cases for Tesla are predicated on China, where EV manufacturers Nio ( NIO), Li Auto ( LI) and XPeng ( XPEV) are eating into the company’s market share.
Tesla may have managed to increase its share of the EV market in the U.S. to around 80% in 2020, but bears note its difficulty selling more EVs elsewhere. China’s competitive EV market has led the company to cut prices multiple times in 2020. Monthly registrations for Tesla’s Chinese-made vehicles have been stuck well below production capacity, and until the Berlin Gigafactory is completed, the company is exporting Chinese-made EVs to European markets.
The Bottom Line: Should You Buy Tesla Stock?
The ride for shareholders seems to be smoothing out as the company meets quarter after quarter of profitability. That said, investors can’t ignore Tesla’s off-the-charts valuation multiples. And though the company reported $31.5 billion in total revenue for 2020, its current market cap is nearly $800 billion.
Tesla has grown into the largest car company in the world and now sits comfortably atop the industry. If things continue to go Tesla’s way that’s not likely to change anytime soon, and if history is any guide, betting against Musk tends to be a bad call.
That said, the risks remain — Tesla is no longer the only EV company worth watching, and investors need to be prepared for the idea that its better-established rivals may supplant Tesla’s position. In short, investors with interest in buying TSLA shares should add them to a well-diversified portfolio — safe advice for whatever stock you’re considering.
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Update 01/28/21: This story was published at an earlier date and has been updated with new information.