Tesla stock (TSLA) is set to close 2019 on a good note. Yesterday, the stock dropped marginally to close at $430.38. However, it still traded near its all-time high. Also, the stock was up marginally in pre-market trades.
However, 2019 wasn’t so great. Tesla started the year with a 7.8% loss in January, grossly underperforming broader S&P 500’s (SPY) 7.9% gain. During the first quarter, Tesla dropped 15.9% in the first quarter while the S&P 500 was up 13.1% during the period.
In a way, the trade war changed the tides in Tesla’s favor. The US-China trade war escalated in May. Since May, Tesla stock is up over 80%, beating S&P 500’s 10% gain handsomely. So far in 2019, Tesla is up 29.3%, marginally outperforming the broader market. In that sense, Tesla is a remarkable turnaround story of 2019.
Tesla stock is lucky for the third time!
Much of Tesla’s rally in the past few months relates to the success of Model 3. Model 3, which was launched in mid-2017, came to life in 2019. Model 3, being a relatively budget electric vehicle, is the company’s first mass-market model with global ambitions. For comparison, the basic version of Model 3 costs about $35,000 while Model S and Model X cost over $80,000 apiece.
In the US, Tesla sold over 133,500 Model 3’s alone in the first 11 months of 2019. Over 17,000 Model X and 15,808 Model S cars started running on American roads during that period. While Tesla Model X deliveries averaged over 10,000 a month in the US in the first 11 months, no other electric vehicles, including other Tesla models, have managed to cross 20% of it.
Together, Tesla models account for about 80% of the electric vehicles sold in the US. Model 3’s success helped grow Tesla’s deliveries by 47% in 2019 until the end of November. Meanwhile, the demand for cars running on fossil fuels dwindled, with US car sales falling by 9.8%. Model 3 has also helped Tesla gain 0.3% percentage point share in the US auto market. However, Tesla still accounts for just 1% of US auto-deliveries. What about other markets?
Tesla deliveries are surging in Europe
Tesla is on course to reach 6 figure deliveries in Europe. Electrek quoted Tesla Motors Club estimates while claiming that Tesla’s European deliveries could touch six figures this year. In this year’s first 11 months, Tesla’s deliveries in Europe came in at around 87,500. In the whole of 2018, Tesla’s European deliveries were just below 30,000. This year, the Netherlands crossed Norway to become Tesla’s biggest European market.
Also, Tesla’s presence in Germany is rising. This year, deliveries in Germany are expected to be over 5 fold of those in 2018. While incentives for owning EVs are falling in the US and China, Germany is an exception. The German government recently hiked the environmental subsidy on electric vehicles. Also, the subsidies will drive the demand for Teslas in the country.
Recently, Tesla drafted a contract to buy land to build Gigafactory 4 near Berlin. Going by how fast Tesla moved with the Gigafactory 3 in China, we won’t be surprised to see the Germany factory coming up in 2020. The factory could employ 10,000 people and can produce 0.5 million cars per year.
The Gigafactory 4 would start with the production of Tesla’s upcoming Model Y, batteries, and powertrains. If the German factory ramps up and Tesla manages to generate commensurate demand for Model Y in the region, we may see a positive impact on Tesla stock. But what about China?
Gigafactory 3 led Tesla stock in 2019, but what about 2020?
Tesla’s China foray was big news in 2020. Within 10 months of groundbreaking, the factory became operational. It is not difficult to understand the motivations behind Tesla’s China foray. First, China is the world’s biggest auto as well as the electric vehicle market. Being present there opens Tesla up to the possibility of exponential growth. In fact, Tesla has had a good year in China.
Tesla saw its deliveries in China spike by 14X in November. The company delivered 5,597 vehicles during the month, according to China Automotive Information Net. Last November, Tesla delivered just 393 vehicles in China. The company’s performance in China is even more impressive considering the weakness in China’s auto market.
China’s auto sales fell by 3.6% in November. This marked the 17th consecutive monthly decline. In November, new energy vehicle sales fell more than 43%. Tesla’s Chinese competitors are struggling to catch up. NIO (NIO) has seen flat deliveries in November compared to October.
Second, producing Model 3 in China helps Tesla save costs. Lower production costs mean Tesla can compete better on price. In fact, Tesla is pushing Chinese customers to buy locally made Model 3s. Tomorrow, Tesla will make deliveries of the first 15 Model 3s made in China. Tesla stock has got a boost in recent weeks as Gigafactory 3 is running ahead of schedule.
In a note, Oppenheimer analyst Colin Rusch said that “expectations for a relatively smooth (production) ramp of Tesla’s China facility are increasing.” With Gigafactory achieving scale in 2020 and getting Model Y out too, it will stay in news in 2020 and may drive Tesla stock.
Will Model Y surpass Model X in 2020?
If 2019 was Model X’s year, 2020 could be Model Y’s. According to Deutsche Bank, Model Y deliveries could start in March 2020. During Tesla’s 3Q earnings call on October 23, Elon Musk said that he was confident about putting Tesla Model Y on the roads in summer 2020.
He said, “We’re also ahead of schedule on Model Y preparations in Fremont, and we’ve moved the launch timeline from fall 2020 to summer 2020. There may be some room for improvement there, but we’re confident about summer 2020.” Musk believes that the Model Y will be even more successful than Model 3, Model S, and Model X combined.
There are a few reasons to believe so. First, the consumer trend is shifting towards SUVs the world over. Model 3 is a sedan while Model Y will be a compact SUV. In the US, the SUV/ Truck sales saw a 3.4% growth in the first 11 months of 2019 while car sales dwindled. In China too, a similar trend is seen.
Model Y will be priced at around $40,000. This puts it in a similar price range of Model 3. Model Y will also have a higher production capacity available to it than when Model 3 debuted. As 2020 goes by, we will also have more updates on Model Y production at Tesla’s Gigafactory 4 in Germany. While the Model Y has the potential to take the Tesla stock even higher, competition can’t be overlooked.
Will Tesla face competition in 2020?
Tesla has so far been the frontrunner in the electric vehicle space. In the US, General Motors (GM) is in second with its Volt and Bolt EVs. However, things are changing.
Recently, Ford launched its Mustang-based Mach-E SUV. In its press release, Ford’s chief product development officer Hau Thai-Tang said, “The Mustang Mach-E wholeheartedly rejects the notion that electric vehicles are only good at reducing gas consumption.” He added, “People want a car that’s thrilling to drive, that looks gorgeous and that can easily adapt to their lifestyle – and the Mustang Mach-E delivers all of this in unmatched style.”
Referring to the Mach-E, Credit Suisse’s Dan Levy said, “The launch marks the first real milestone in Ford’s increased emphasis in electrification, and more importantly marks an increased effort by the legacy US automakers to be relevant in electrification.”
Also, Tesla is facing competition from a startup, Rivian, which is launching its truck, R1T, next year. We may also see Tesla Cybertruck and Ford F-150 fighting for market share soon. Globally, Volkswagen may be a big threat to Tesla. Volkswagen recently upped its EV game by setting a target of 1 million EVs by 2023 from earlier 2025. In spite of all these developments, 2020 looks like a largely safe year for Tesla’s dominance and, in turn, Tesla stock.
Tesla is ahead in batteries
However, Tesla is still ahead of Ford and other competitors when it comes to batteries, which is a critical component of electric vehicles. Dan Levy from Credit Suisse, who is a Tesla bear, admitted that Tesla is leading in the game.
He said in a note this month, “We believe Tesla is leading in the areas that will likely define the future of carmaking – software and electrification.” Talking specifically about Tesla’s lead in batteries, he said, “Tesla is likely ahead of others on batteries – the core of the electric powertrain.”
Tesla faces subsidy headwinds
Tesla’s success in selling electric vehicles may be their weakness when it comes to the EV tax credit arrangement. According to the Office of Energy Efficiency and Renewable Energy, the EV tax credit, which can extend to $7,500, is currently only for manufacturers that have sold less than 200,000 electric vehicles. Tesla aims to have over 100,000 deliveries in the current quarter to mark 360,000—400,000 deliveries in 2019. So, Tesla is well past the threshold for tax credits. In fact, Tesla vehicles are eligible for only $1,875 in Federal EV tax credits now.
2019 is passing without any approval for the extension of the EV tax credits. If Tesla’s EV credit lapses, it could benefit competitors who are late in the EV party. Having a threshold based on the number of vehicles sold may be advantageous for the laggards in the EV revolution. Automakers like Ford and Fiat have the latecomer’s advantage. Especially Ford could benefit from this as it goes on to the market with the Mach-E and F-150 electric.
Is Tesla stock becoming a Wall Street darling?
With all the positive developments, there are definitely good things to say about Tesla stock. Tesla has even won over some of its detractors. A few days ago, CNBC Mad Money host Jim Cramer said during the show’s lightning round, “I don’t want you to own Ford, I want you to own the stock of Tesla.” He added, “I’m not saying one’s safer than the other, I’m saying they both have just O.K. balance sheets, but one’s got more upside.”
Wedbush’s Dan Ives recently raised his price target on Tesla stock by a hundred dollars. We have already talked about the good words that Levy had to say about Tesla.
In spite of this, Tesla is far from being a Wall Street darling. Levy still has a $200 price target on Tesla and Ives is still on a “neutral” rating in spite of raising the price target. Out of 33 analysts surveyed by Reuters, only 11, or 33.3%, were bullish about Tesla stock with a “buy” rating. So, 9 were on a “hold” and 13, or 39%, were recommending a “sell.”
The average target price is still under $300, pointing to a potential downside of over 30%. Can Tesla surprise Wall Street in 2020? The answer lies primarily in China and Model Y.
Summing up Tesla stock
Tesla will go into 2020 with head held high. There are a lot of things that are going well for Tesla. The model X is successful. Tesla is beating expectations on factory ramp-ups. Also, Model Y may start running on roads earlier than expected. And, cybertruck pre-orders have surprised many.
However, rising competition, Tesla’s diminishing advantage in charging networks, and the subsidy issues are to be watched out for. Plus, Tesla stock is also not trading cheap at over 39X its past year EBITDA (Earnings before interest, taxes, depreciation, and amortization).
Ford is trading at a multiple of 9.8X, while General Motors is trading at a multiple of 6X. Only profitable growth can justify Tesla’s valuation in 2020.