Tesla (NASDAQ:TSLA) has been in the news lately for multiple reason. But primarily due to its quarterly performance and its CEO Elon Musk’s tweets. Tesla, unlike any other automobile company, has proven to sustain the first quarter of 2020 by delivering its third continuous profitable quarter.
The rapid spread of COVID-19 virus and extensions in lockdown has increased the uncertainties among the investors. Musk’s recent controversial tweets just add fuel to the heightened uncertainties. However, one cannot ignore the value investors have received from Tesla. This is one of the major reasons behind why investors and analysts predicts the surge in its stock value.
Tesla shares jumped 49.2% in the month of April, 2020. The automobile company bounced back from its 21% dip in the month of March, 2020. This dip was due to the discontinued supply chain and abrupt stop in manufacturing. Unlike Tesla, many companies are still facing a revival trend after a sharp drop in the market.
In April 2020, Tesla’s valuation surged due to its record production (103,000) and delivery (88,400) statistics in a quarter. The company’s recent quarter reports delivered earnings of $1.24 per share on revenue of $5.99 billion (non-GAAP Adjusted). The investors’ sentiment went bullish after Tesla had its first positive GAAP net income ($16 million & $0.09 per share) in the quarter. Year on year basis, a 38% increase in automotive & 32% increase in total revenue.
Apart from the impressive three-month performance, Tesla stock has gained more than 90% in a year. Tesla stock is a top performer in NASDAQ-100. The stock has crushed comparable double digit drop of S&P 500 and Dow Jones Industrial Average. Analysts are optimistic after seeing a surprise profit in Q1 2020. Sentiments among analysts signal that, barring Ferrari, Tesla could be the fastest growing and most profitable auto company in the world.
Over the past few years, Tesla has improved its long-term gross profit margin potential. The company has become efficient in its operating leverage and is lowering the cost of capital gradually. Its no middle man delivery system has improved its production to delivery ratio. Also, stock in dealership and parts supplier are down roughly by 50% year to date on average. These are the key drivers that makes the company unique. The market is responding positively to it and it is a key factor for future surge in the company’s growth.
Production rather than demand is the primary focus of Tesla’s investor. For past two years, Tesla has shown a rapid increase in its production capacity. From 22.14K at the end of 2017 to 86.9K at the end of 2019. In the first quarter of 2020, Tesla produced 103,000 vehicles and delivered 88,400 vehicles. These figures are from first week of 2020 till last week of March. However, Tesla is slightly conservative in the delivered vehicles numbers. In the current pandemic situation, Tesla is delivering its vehicles by what the company calls a “Direct Drop” – a touchless payment and documents verification without any human interface.
Not long ago, Tesla CEO Elon Musk projected an ambitious number of 500,000 vehicles produced in year 2020. But with the current situation escalating analysts are worried that this number may come down to 400,000. The Tesla’s Giga factory located in Alameda County; California has been shutdown since the stay-at-home orders. There were concerns that the new Giga factory in China could stop the production due to the pandemic. This could dampen the company’s substantial growth in high potential EV market. However, with the start of normal operations in China, these hiccups are bound to overcome.
Production in China
In March 2020, Tesla sold roughly 10,000 vehicles in China. The company’s highest ever monthly production number. According to the few sources the estimated capacity of the factory is around 3,000 vehicles per day. This puts the Elon’s ambitious 500,000 target within reach. Due to COVID-19, car sales dropped nearly 40% as compared to the prior year.
China is potentially high growth environment for Tesla. Primarily due to the government’s focus in promoting electric vehicles. Government has introduced EV-purchase subsidy program in April. This is beneficial for the company’s growth in the foreign market. Moreover, the program has been officially extended till 2022. The subsidies only apply to EVs priced less than $42,000. The company has already adjusted its price for the foreign market to fit multiple models in the criteria. There’s also a surge in car purchase in the month on March & April. Car purchase was down by 80% in the month of February.
China is a key market for Tesla & will account for at least 30% of its targeted sales. In 2020, the company aims to deliver 145,000 Model 3 sedans in China.
Among many auto manufacturers, Tesla has shown promising sign of mass production, delivery and expansion. A feat many of the company’s peers have failed recently. It is a positive sign for the growth of the company.
Way to S&P 500
Tesla is setting record numbers in revenue, production & deliveries. With its expansion in China, the company’s growth story is even more compelling. If the past 1-month data is evident, this growth has increased the institutional buying pressure. However, one checkbox which Tesla is yet to tick is its inclusion in the S&P 500.
Tesla has already met many of the requirements to be included in the S&P 500. It has already crossed the market valuation of $8 billion along with the per month trading volume of 250,000. The missing link is the company’s profitability streak. To be included in S&P 500, a company is required to report 4 consecutive profitable quarters. Tesla has the longest streak of three until first quarter of 2020. If the company reports profit in its next quarter, it will be eligible to be included in S&P 500. However, with the uncertainties in resuming production at U.S. it will be difficult for the company to report the profit.
The company’s inclusion in S&P 500 will unlock institutional buying pressure in the market. This will surge the company’s stock price to possibly worth of $1000 per share.
The above three reasons are one of the most effective reasons to boost the Tesla’s share price surge. Amidst the current situation the company, from its innovative business model, proved to deliver value to its shareholder as well as customers. Above points and the past performance provides a possibility of surge in stock prices of Tesla. However, the future is uncertain!!