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Shares of electric vehicle manufacturer Tesla (NASDAQ: TSLA) were on an absolute tear in 2020 and gained close to 800% last year. However, since the start of 2021, Tesla stock is down 3.4% and is currently trading 23% below its record high. Comparatively, the S&P 500 Index has returned close to 14% year to date.
So, can Tesla stock mount a comeback after a lackluster start this year?
Tesla stock has crushed the broader markets since its IPO
Tesla has already created massive wealth for long-term investors. For example, if you would have invested $1,000 in TSLA stock just after it went public, your investment would be worth close to $180,000 today. In the last five years, shares rose more than 1,570%
In 2016, Tesla was about to launch its Model 3 and take the EV market by storm. Investors were then worried about the company’s ability to manufacture quality cars at a high volume while managing a robust charging infrastructure and quality after-sales service.
It’s quite evident that Tesla has put these doubts to rest. In 2020, the company produced and delivered 500,000 vehicles generating $30 billion in annual sales. Comparatively, its sales in 2017 were less than $12 billion.
Elon Musk has always emphasized that Tesla’s advantage lies in its manufacturing capabilities and the company has more often than not delivered on its promises. Four years back, Tesla boosted energy capacity by 50%. It completed the construction of its Shanghai-based Gigafactory in less than a year allowing Tesla to expand total capacity and reduce costs as it now shipped fewer units across the ocean.
The EV giant opened new Gigafactories in Texas and Berlin and expects deliveries from these manufacturing units to begin in 2021. These capabilities have allowed Tesla to lower its average cost per vehicle by 55% since 2017 which meant it ended 2020 with an operating margin of 6.3%.
According to Wedbush analyst David Ives, Tesla might deliver close to 850,000 vehicles in 2021, indicating year-over-year growth of 70%. Tesla aims to increase its deliveries at an annual rate of 50% and estimates to deliver 2.5 million vehicles by 2024, making it one of the hottest growth stocks on the S&P 500.
The final takeaway
Investors looking to bet on Tesla should embrace its ongoing volatility due to its steep valuation. Wall Street expects Tesla to increase sales by 55.6% to $49.1 billion in 2021 and by 34% to $65.7 billion in 2022. Comparatively, its earnings are forecast to increase by 102.2% in 2021, 37.3% in 2022, and at an annual rate of 44.5% in the next five years.
Given Tesla’s market cap of $655 billion, we can see the stock is trading at a forward price to sales multiple of 13.3x and a price to 2021 earnings multiple of 150x which is steep.
However, growth stocks command a premium. Further, Tesla’s balance sheet is also strong and the company ended Q1 with a cash balance of $17.14 billion and less than $12.5 billion in debt. In the last 12-months, its operating income stood at $2.2 billion while interest expense was just $678 million.
An unorthodox but visionary CEO with Elon Musk at the helm might contribute to the rapid spikes and decline in TSLA stock. However, long-term shareholders might be happy to endure these wild swings if Tesla continues to lead the global EV market and is successful in disrupting the automobile market in the upcoming decade.
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