Tesla Stock Surge – Momentum or Overvaluation?
If you bought 1830 shares of Tesla stock on June 3, 2019 at $178.97 per share, you would be a millionaire today. In 2019, Tesla’s stock surged over 200% from its lowest point to $558.02. Growth momentum in the stock’s share price not only illustrates investor confidence, but, also, the company’s ability to surpass market expectations. The rate at which the market continues to pool money into Tesla, despite its high valuation, presents an interesting case study.
A combination of promising quarterly results, favorable outlook, and earnings surprises accelerated the growth of the stock. In the third quarter of 2019, Tesla delivered a record number of 120,000 cars between Model 3, Model X and Model S which represents a standalone achievement. Yet the car manufacturer took a step further and beat analyst consensus for production levels by 11%. Bottom-line paralleled top-line growth. Tesla posted its first quarterly profit of $143 million for the year, after cumulative losses of $1.1 billion during the first six months. The adjusted earnings per share of $1.86 trumped analyst forecasts which ranged from negative $1.25 to positive $0.34. Benchmarking to the previous year, Tesla ramped up production by 50% and delivered a total of 367,500 vehicles. Astonished by the stellar performance, investors rushed in for a share of the company. Robust performance for the year also led CEO Elon Musk to develop the same bullish outlook, expediting the launch of the Model Y sport vehicle months ahead of the initial schedule. The electric car manufacturer’s remarkable results both surprised and pleased investors, boosting market confidence and driving the Tesla stock to new all-time highs.
As future cash flows form the basis of company valuation, the stock market favors those with strong fundamentals. Tesla’s recent factory expansion into Shanghai and planned expansion into Germany depicts a positive outlook. Since companies plan production according to demand expectations, Tesla’s acceleration of facility expansion signals an increase in future demand to the market. Each factory plans to begin with 150,000 cars and eventually reach an annual capacity of 500,000 cars. Although churning out an additional million cars may be impressive, the pace at which Tesla completed the facility expansion deserves greater recognition. Just 357 days after the construction of the Shanghai Gigafactory began, the company brought its first model to market. The record-building time has motivated Elon Musk to set the same ambitious goal for its planned German Gigafactory, with some allowance for delays due to regulatory barriers. Setting international production facilities helps establish Tesla as a global car manufacturer and distributor. The incredible speed at which Tesla expands its operations while optimizing cost structure and customer reach fuels top and bottom-line growth, which the market has responded optimistically by hiking up demand and consequently share price. Tesla has passed the $100 billion market cap threshold, becoming the second-most-valuable auto maker.
Tesla’s outlook also stems from its first-mover entry into the green automotive market. Electric cars embody the next generation of transportation as talks of environmental consequences have alarmed businesses and consumers. From 2010 to 2018, worldwide investments in clean energy rose by 21% to $288.3 billion, while consumption of renewable energy increased more by 229% to 561.3 million metric tons of oil equivalent. With little expectations of a trend reversal, consumer concerns for future sustainability provide the perfect timing Tesla to capitalize on electric vehicles. The year 2019 has hit the world particularly hard. NASA reported 2019 as the warmest year on record driven by anthropogenic activities with carbon dioxide levels in the air at their highest in 650,000 years. This increased awareness of clean energy accelerates the transition from traditional fuel-burning cars to Tesla’s electric cars.
Target price revisions by analysts further support the stock’s upward movement potential. Positive earnings and future growth momentum have led to multiple price target upgrades. On January 13, 2020, Colin Rusch at Oppenheimer & Co raised his price target by 59% from $385 to $612 to reflect Tesla reaching sufficient cash flow levels to support its business activities. Investors who use target prices as a proxy for intrinsic value have seized the opportunity to participate in the growth of the stock. As with any product, rising demand leads to higher prices, which completes the self-fulfilling prophecy set forth by analysts.
However, to what extent can Tesla’s stock sustain this dramatic outperformance? Tesla’s stock has already returned 20% since the beginning of 2020. As expectation increases, the stakes become higher for Tesla meet them. Any impediment to the drivers of value, such as delays in the German factory construction and legal obstacles, could reverse the upward trend. Existing investors should consider whether Tesla can afford the current rate of stock price appreciation and speculators should gauge the appreciation potential of the stock.
While demand for Tesla’s stock continues to rise, some speculators have shifted their outlook by shorting it. Short-selling – an investment strategy where a speculator “borrows” the stock from an existing investor and sells it on the open market – occurs under the expectation that the share price will fall. Through short-selling, the speculator gains from buying the stock back on the market at a lower price than which it borrowed for. As of January 16, 2020, Tesla has become the most shorted stock in the US, the aggregate short positions valued at $14.5 billion, close to 15% of its market cap. The large volume of short sales indicates a mixed market sentiment as investors consider the risk of price depreciation and question whether Tesla’s market value had exceeded its intrinsic value.
The surge in Tesla’s stock price over the past year has been a remarkable sight for its investors. The timing of several key catalysts has demonstrated Tesla’s ability to recover from negative profits and turn the situation around. Its mission to “accelerate the world's transition to sustainable energy” eases worries of an unsustainable future as a result of consumer indiscretions. While the growth does not come unwarranted, the issue concerns whether the pattern will persist as Tesla faces more pressure to meet and exceed market expectations. The current market expresses mixed feelings with target prices ranging from $54 to $800, which introduces uncertainty and has led to increased amount of short interest. Surely, the stock could sway in both directions and the market will have to wait for the next major event – the fourth quarter 2019 results announced on January 29 – for an answer.