🚗 Is it too late to buy Tesla stock?
Tesla is one of the most talked about and polarising stocks in the financial markets. Many people have a strong, almost visceral reaction to the stock - you either love it or hate it.
But even the company’s detractors cannot deny that Tesla has had an incredible run-up over the past couple of years. So how did we get here? What were the main events which led to this spectacular performance. And is too late to get in now?
PS: if you want to skip the background on the price movements over the past two years, you can go straight to the Future Developments and Verdict sections at the end. (This is the really juicy stuff). Now, let’s dive in.
The story so far: a brief history of Tesla’s stock price since January 2020
Jan 2020 - August 2020
During the first global wave of the corona crisis, Tesla stock shot up by over 400%. Some of this was due to increased retail speculation linked to the unique economic conditions of the pandemic, but there were also a number of fundamental factors at play. In particular the market was caught off-guard by the speed at which Tesla built its latest factory in China. This surprise was especially acute given the company’s reputation for having multiple manufacturing problems in the US.
End of August - December 2020
On August 31st, Tesla completed its five-for-one stock split. This meant that now there would be five times more shares in circulation and the price per share would be reduced to 1/5th of the price prior to the change. Ostensibly the split was done to make owning the stock more accessible to a wider group of investors. But in practice many retail investors were already able to buy Tesla stock with relatively small amounts of money. Apps such as Robinhood in the US and Freetrade in the UK allow users to purchase fractions of a single share for example.
Later in the year on December 21st, Tesla was also formally added to the benchmark S&P 500 Index. This event had huge structural implications for the stock because so many major funds are linked to the S&P 500. A number of large institutions were obliged to buy significant quantities of Tesla stock to ensure that their holdings continued to accurately track the index.
During the period when these two events took place, the stock soared even further, running up an extra 300%. By the end of 2020 the price hit $705.67 per share compared to around $95 at the beginning of the year. Over the course of the whole of 2020 Tesla had increased in value by a massive 643%.
Performance over 2021
Tesla’s stock price continued to perform well in 2021, although not to the same breathtaking extent as in 2020. The stock climbed to all-time-highs at the beginning of November, before eventually settling at $1056.78 per share by the end of December. This represented an impressive 47% return for the year, outpacing the broader S&P 500 Index which was up only 27% over the same time period.
First Quarter of 2022 (Jan - March)
Like many other tech stocks trading at high multiples, Tesla’s price has also declined in the first quarter of 2022, with market uncertainty over inflation, the Fed raising rates and the invasion of Ukraine weighing heavily on investors. So far the stock is down over 24% for the quarter but has recently picked up slightly in the last week. This is due to a major product announcement expected in the coming days, dubbed by CEO Elon Musk as “Master Plan 3”, and also Tesla’s new Berlin factory coming online. The implications of this new factory will be explained in the next section.
Future developments
Two new factories coming online
There are bullish signs for the company’s core vehicle manufacturing business. Tesla’s first European factory in Berlin has just been given approval to start production and a second major facility in Texas is also just about to come online as well.
Tesla’s CFO has also said that the company doesn’t even need both factories to be fully operational to hit its target of delivering 50% more vehicles in 2022.
Having said this, the question remains whether these ambitious goals can be achieved in the face of rising raw material costs and continued global supply chain issues.
Human ride-sharing services
Tesla’s launch of a conventional “human” ride sharing service similar to Uber or Lyft is still more in the realm of calculated speculation. It has not been officially announced yet but Elon Musk has suggested in the past that he might be open to the idea. Also a group of Tesla programming enthusiasts have found hints in updates to the Tesla app that vehicle sharing features could be coming soon.
In a recent report Ark Invest argued that human ride sharing would be a crucial first step towards fully autonomous ride-hailing. Ark estimated that in their most conservative “bear case” scenario, this new business line would add “$20 billion to Tesla’s operating profit by 2025”. This would result in revising the firm’s price target for the stock by an extra $500”.
Autonomous ride-hailing
For many the idea of a fully autonomous fleet of “robotaxis” still feels like it belongs more to the genre of science fiction than in a financial report. But, based on recent improvements in machine learning technology, Ark puts the probability of such a development at about “50%”.
It should also be noted that Musk has previously said that he expected Tesla’s autonomous taxi service to be operational as early as 2020.
Of course if Tesla is able to execute on the vision of autonomous ride-hailing, it would become the company’s most profitable segment. As a result Ark predicts that the service would make up the “majority of Tesla’s enterprise value in 2025.”
Verdict
Autonomous ride-hailing is the key to Tesla making the transition from a pure electric carmaker to a business enjoying software-style profit margins on a vast scale. But even Ark Invest, one of the Tesla’s greatest supporters, only think this outcome has a 50% probability.
Even if the company is able to pull off this revolutionary feat in business and technology, Ark’s mid-level price target for 2025 is $3000. This represents a 200% increase or tripling of your money. While this is clearly an excellent return, it does pale in comparison to Tesla’s recent performance of more than 870% over the past two years.
Both Tesla’s critics and supporters point out that at a valuation of almost $1 trillion, the stock is already priced near perfection. This means that the company must deliver almost perfectly on most of the goals and promises it has made to the market to date. As a long-term investor you must weigh up the risk and reward profile to decide whether it is worth buying Tesla at these levels.
What did I miss? - These reports are a learning process for me and I’m very open to constructive feedback and suggestions.
What stock or crypto asset should I cover next? You can contact me by email: hellorobostox@gmail.com or feel free to leave your response in the comments. You can also follow me on Twitter: @daneasterman.
Disclaimer: I am not a financial advisor, none of this report should be taken as financial advice. Instead this should be viewed as starting point to conduct your own research. I am long Tesla stock at the time of writing.