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Should You Buy Tesla (TSLA) Stock?

After the company’s fourth quarter earnings announcement, shares fell during after-hours trades on the news that Tesla had exceeded revenue expectations but missed earnings.
California-based electric vehicle manufacturer and clean energy company Palo Alto specialises in the development, manufacture, and sale fully electric vehicles (EVs). They also provide vehicle service centers, supercharger stations, and cars with ever-improving self driving capabilities.

TSLA shares grew nearly 700% over the course of 2020. Many investors may be asking: “Is it the right time to purchase TSLA stock?” Consider the pros and cons before you make a purchase.

Tesla at a glance
The pros of buying
The cons of buying.
Bottom line: Should Tesla stock be bought?

Tesla at a Glance

Tesla went public in 2010 offering 13.3 million shares for $17 each share. Shares are currently trading at more than $830 per unit as of the writing of this article.

Although this is a remarkable return on investment, it was a difficult road to get there. There have been missed deadlines, controversial comments by CEO Elon Musk, and steady stream of traders who decry the company’s valuation, and recommended shorting the stock.

Tesla, which has a market capitalization in excess of $800 billion is the world’s biggest automaker. It is larger than Toyota Motor Corp. (TM), Honda Motor Co. HMC and General Motors Co. (GMC) all combined. These companies all took Tesla’s lead and built their own electric and low emission automobiles. However, Tesla remains the dominant player in the U.S. market.

Although a 700% increase in share prices might seem sufficient for most companies, Tesla’s inclusion on Dec. 21 in the S&P 500 was the main event of 2020. It was a long process for Tesla. The S&P Dow Jones Indices kept Tesla’s shareholders on the sidelines even though the company had posted the four consecutive quarters of profitability that were required to be included in the index.

What does Tesla look like today, after its first earnings report?

After the bell rang on Jan. 27, the company released fourth quarter earnings with mixed results. The company’s total revenue increased 46% year-over-year to $10.74 billion. Earnings per share were 24 cents, which represents an 118% increase over last year. However, when adjusted for one time items, Tesla earned 80c per share. Although this was below the $1.03 per-share expected by analysts shareholders should be happy to see that it was Tesla’s sixth consecutive quarterly profit.

The pros and cons of buying Tesla stock

The record-breaking number of deliveries and production was one of Tesla’s brightest spots according to its most recent earnings report. Tesla produced 179.757 vehicles in the fourth quarter. This is a 71% increase over the same quarter last years and more than the 145.036 vehicles it built in the previous quarter. Tesla delivered 180,667 vehicles, a 61% increase year-over-year.

Tesla had set a lofty goal to deliver 500,000 vehicles by the end the year. Despite the disruptions caused by pandemics to its production lines, Tesla still managed to deliver 499,647 vehicles over the course of 2020. Tesla’s management team believes they can improve that by promising a 50% annual growth rate in deliveries in the next few years.

Where are all the new cars coming from?

Tesla’s Fremont facility in California continues to grow. The company has been upgrading the factory over recent weeks to be able to produce the Model S and Model X, as well as the Model 3 and Model Y. The Model 3 is currently produced at the Gigafactory Shanghai, while Model Y production started in late 2020. This will continue to grow over the next year.

Tesla also noted that the construction of its factories in Berlin, Texas and Austin, Texas is continuing. Additionally, machinery has been moved to the Berlin location. The Tesla Semi and Tesla Cybertruck will be produced in Austin, and are expected to arrive in 2021 and 2022 respectively.

Free cash flow was another indicator of improved operations. It remained positive for the second consecutive year. Tesla’s free cash flow reached $2.79 Billion in 2020, more that twice the $1.08 Billion it collected in 2019. Tesla also had a record $1.9 Billion in free cash flow in the fourth quarter to help them get to the finish line.

It is a remarkable combination of increasing production and improving financials. While the company is doing well, Tesla seems to be benefiting from macro trends.

Bullish investors are optimistic about fully autonomous vehicles in the long-term. While there are many companies working towards that goal in some way, Tesla’s lead is hard to overcome. Tesla’s use GPS, radar, and cameras has advanced over the years to make their vehicles practically self-driving. This opens up the possibility of other growth avenues: Musk spoke during the earnings call about self-driving Teslas being used to be robo-taxis. This would be a futuristic and fantastic idea for anyone, but it is for Musk and Tesla.

With President Joe Biden’s victory in November and Democratic control of Congress, there are greater opportunities for Tesla. Tax credits will be available to both manufacturers and consumers for companies that are focused on green technology and emissions-free technologies. Although those benefits have not yet materialized, President Biden’s ambitious plans for combating climate change point to many future opportunities.

The Cons of Buying Tesla Stock

Tesla’s greatest asset, however, is also its greatest threat: Elon Musk.

Investors will point to tweets after tweets of negative rhetoric from the CEO. The most famous example was Musk’s tweet in August 2018, which stated that he was considering taking Tesla private for $420.

In settlement with his lawsuit against the U.S. Securities and Exchange Commission, Musk was forced from his position as chairman of the board to resign. Musk, unfazed by his actions, smashed billions off Tesla’s market value last year, tweeting: “Tesla stock prices are too high imo.”

It’s clear that Tesla would not be worth as much if Musk wasn’t there – but Musk’s immense status indicates the key-man risk associated with the stock and the company’s stock price. Tesla shares would be affected if Musk were to leave the company to concentrate on SpaceX or was terminated for his conduct. However, the worst fate for Tesla shareholders could be if he stays.

Tesla is now facing bigger problems all over the world: it’s not the only company in the electric vehicle industry.

Today, every automaker is striving to be the best and most successful EV company in the world.

In the U.S. that means Ford (F), a company investing heavily in startups like Rivian, while GM will be releasing a staggering 30 new EVs in 2025. Many of Tesla’s bull cases are based on China where EV manufacturers Nio, Li Auto (LI), and XPeng(XPEV), are reducing the company’s market share.

Although Tesla may have increased its share of the U.S. EV market to about 80% by 2020, it is worth noting its difficulties selling more EVs in other countries. The company has reduced prices several times in 2020 due to China’s EV market. Tesla’s Chinese-made vehicles are still being registered monthly. Until the Berlin Gigafactory is complete, the company will continue to export Chinese-made EVs into European markets.

Tesla stock forecast – The bottom line: Should you buy Tesla stock?

As the company achieves quarter after quarter profitability, it seems that shareholders are enjoying a smoother ride. However, Tesla’s out-of-the-charts valuation multiples are not something investors should ignore. The company’s 2020 total revenue was $31.5 billion. However, the current market cap of Tesla is almost $800 billion.

Tesla is now the world’s largest car manufacturer and sits at the top of the industry. If things continue to go Tesla’s way, it is unlikely that they will change anytime soon. History shows that betting against Musk is a poor idea.