Teslain (NASDAQ: TSLA) shares rose an incredible 695% in 2020, making it one of the most valuable companies in the world, with a valuation of $ 630 billion. Investors bought Elon Musk’s product line, growth narrative, autonomous technology and manufacturing expansion plans. Still, there are doubts about the inventory going to 2021.
By any traditional measure, Tesla’s assessment looks crazy. The company is valued at 24 times sales and the price / earnings ratio is 1,332, despite generating hundreds of millions in sales of regulatory credit that are not central operations. So, will stocks continue to rise or is the valuation higher than investors should start now?
Image source: Tesla.
The Tesla model is working
Elon Musk has always argued that Tesla can generate better margins than traditional automakers, eliminating dealers from the equation and having lower production costs through simple designs of electric vehicles. So far, this model is proving to be correct.
Tesla’s revenue has skipped over the past five years and is generating a gross margin of more than 20% on a regular basis, which is close to the top of the auto industry.
TSLA revenue data (TTM) by YCharts
What is even more impressive is that Tesla maintained strong margins by reducing the average selling price of vehicles. The company clearly has a cost structure that competitors have not achieved, and with sales growing as self-directed now on the market, there may be opportunities to further increase margins.
Is Tesla’s construction too big, too fast?
Tesla’s production is expected to reach around 500,000 units in 2020 and could increase rapidly in the coming years. The Giga Shanghai is already up and running, and the Giga Berlin is expected to start production in mid-2021, bringing Tesla’s production capacity to more than 1 million vehicles a year.
At the same time, Tesla is expanding, competitors are building their own EV capacity. Nio (NYSE: NIO) expects to increase its own production capacity from around 60,000 vehicles a year today to 150,000 by the end of 2021. Volkswagen has the capacity to build 300,000 electric vehicles at its new plant in China and says it will be able to build 1.5 million EVs annually by 2023. General Motors (NYSE: GM) has not set short-term production targets, but plans to invest $ 27 billion in EVs and autonomous driving between now and 2025. This is beyond Nissan, BYD, Hyundai, Rivian, Fisker, BMW and many others have invested in electric vehicles that have not yet reached the market. In doing so, Tesla will face competition like never before, which can affect volume and price.
Competition can be a problem for Tesla because it has been struggling to make money despite selling all the vehicles it could produce. The automotive business has a lot of operational leverage, so any reduction in utilization or reduction in price will have a major impact on financial results. At the moment, investors expect sales volumes to grow rapidly and prices (that is, the margin) to remain high – so any change in that thesis could hurt inventory.
Autonomy is a strength that can become a weakness
Today, Tesla looks like a leader in autonomous driving. He is charging an extra $ 10,000 per vehicle for his “autonomous driving” Autopilot software, which actually has limited autonomous driving capabilities. Investors who think Tesla will be able to generate a margin similar to that of software from products like this may think the price could go up. But there is reason to think that Tesla is making easy money with early users, while neglecting the real disruption in autonomous driving.
The most advanced autonomous driving technology is being built by companies like GM Cruise and Alphabetin (NASDAQ: GOOG) (NASDAQ: GOOGL) Waymo, which has already put millions of miles on the road in fully autonomous mode. And they are creating business models that will allow autonomous sharing of low-cost tours in cities around the world.
As Tesla increases its capacity, Cruise and Waymo are building business models that totally change the idea of vehicle ownership. No matter how you look at it, autonomous driving is coming, but that may not be good news for Tesla if its software-as-a-service business model is invaded by autonomous travel sharing that offers a much lower initial cost model “transport as a service” business model.
Are Tesla shares a purchase today?
I can’t get behind Tesla at that price. The company’s growth is impressive and has proved that electric vehicles can be a viable product in the long run. But without regulatory credits, the company is not yet profitable.
Meanwhile, more than a dozen competitors are building attractive EV offerings that will hit the market in the coming years. This competition will be more attractive than anything Tesla has faced in the past and could mean not only less demand for Tesla cars, but also less regulatory credits needed by competitors.
Given all the pressure coming from Tesla, I don’t think next year will be good for inventory. It’s definitely not a car stock that I would buy after the incredible 2020 race.