Tesla: Impressive Production Mark, But the Stock Needs a Breather

While the market spent the first trading day of 2021 fretting over whether Tesla (TSLA) met original 2020 delivery targets of 500K EVs, the company actually produced far in excess of 500K vehicles. The stock jumped to all-time highs on the positive production news which also includes beginning Model Y production in Shanghai.

Tesla has been on a massive rally over the last year with gains of over 850% now. The stock needs to cool off following the big gains of 2020 that have sent the market cap to over $760 billion now, but the long-term investment story remains solidly intact.

Big Delivery Targets

Tesla originally set a 2020 delivery target of 500K cars and the company hit 499,550 for the year. Tesla only ended up 450 vehicles short of their internal goal and beat analyst adjusted targets despite the COVID-19 impact on production.

While the market focuses on actual deliveries, the ultimate number that matters is the production levels. For 2020, Tesla actually produced 510K EVs focused on the Model 3/Ys at 455K vehicles.

Since Tesla doesn’t count a car delivered until transferred to the customer with all paperwork correct, the actual delivery numbers lag production. At this point, customers don’t need to fret whether the EV company has the demand to match higher production levels.

Tesla now needs to get production ramped in Shanghai in early 2021 and to finish new factories in Brandenburg, Germany and Austin, TX to benefit from higher demand. In order to meet aggressive targets of producing 1 million EVs in 2022, the company will need these new factories online by mid-2021. Analysts have Tesla delivering 785K vehicles this year for an incredible 57% growth rate. The company will produce an additional 385K EVs this year alone.

China Threat

The stock trades over 17x 2021 sales estimates of $45 billion in an EV sector quickly becoming highly competitive. Even if Tesla continues with massive growth over the next decade, the stock needs to rest after the massive rally in 2020.

Although prospects look strong in China, Tesla does enter a far more competitive market now. Li Auto, Nio and XPeng lead a Chinese EV market where each of these local companies are now producing 5-7K EVs per month starting in December. These companies don’t match Tesla, but each company has reached scale approaching an annual rate of 100K EVs.

While the Chinese EV market is expected to reach 1.8 million units in 2021, Tesla has far more formidable competition in this market. Investors buying the stock, after the massive rally, aren’t fully pricing in the risks to the story where producing several hundred thousand more EVs per year and competing outside the domestic U.S. market has higher execution risks due to local governments.

Takeaway

The key investor takeaway is that Tesla remains one of most dynamic companies in the world run by CEO Elon Musk. The stock rally in 2020 is ahead of the reality of production growth in the 50% annual range. While impressive, Tesla will continue to face additional competition in the domestic market and especially in global markets such as China. Investors should let the stock pause here.

The word on the Street points to a sidelined majority on Tesla. In the last three months, the electric car maker has landed 7 Buy ratings vs. 13 Holds and 6 Sells. The consensus average price target points to $517.96, or nearly 36% downside potential for the stock. This suggests that by consensus expectations, for now, the bears win on Tesla. (See TSLA stock analysis on TipRanks)

Disclosure: No position.

Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.