The last year was a volatile one, to say the least, for equity investors. The markets turned bearish in a span of five weeks as the COVID-19 pandemic brought the world to a standstill. However, as governments pumped in trillions of dollars to boost economic activity and consumer spending, investors experienced a snap-back rally that was equally unprecedented.
Companies in the technology and electric vehicle (EV) space generated outsized returns amid the pandemic and one of the top-performing companies in 2020 was EV giant Tesla, a stock that gained a mammoth 820% in the last 12-months and almost 700% in 2020.
Tesla has multiple growth drivers
Tesla is now one of the most valuable companies in the world and was recently added to the S&P 500 as well after the automobile company consistently reported profits for five consecutive quarters.
It seems Tesla investors were optimistic about its product portfolio, growth potential, expansion plans, and robust technology that drove the stock to record highs. The shift towards EVs is bound to gain pace in the upcoming decade which means investors can expect Tesla’s top-line to keep growing at a stellar rate over the long-term.
While the EV space is likely to become crowded driven by rising demand, Tesla’s first-mover advantage and a visionary CEO make the stock a solid pick for 2021 and beyond.
Elon Musk has stated that Tesla will be able to produce higher profit margins compared to peers by lowering production costs and adopting a dealer-free business model. The company has also managed to increase gross margins despite lower automobile prices and these trends have supported its stock gains.
Tesla’s vehicle deliveries in 2020 were just shy of 500,000 and the company is poised to increase annual production capacity to over 1 million by mid-2021. Comparatively, it delivered 368,000 vehicles in 2019.
It means full-year deliveries were up 36% year-over-year while Q4 deliveries rose 61% compared to the prior-year period.
What next for investors?
It is natural for prospective investors to feel that Tesla stock is overpriced right now. Tesla is valued at a market cap of $835 billion which means its trading at a forward price to 2021 sales multiple of 18.3x. Comparatively, tech giants such as Apple, Amazon, and Alphabet are valued at 7x, 3.6x, and 5.6x 2021 sales.
We can see that Tesla is trading at a significant premium to the largest companies in the world. However, Wall Street expects Tesla to increase sales by 26.3% to $31.05 billion in 2020 and by 46.7% to $45.5 billion in 2021.
Analysts have a 12-month target price of $451 for Tesla which means it’s trading at a premium of a massive 49% right now. It seems Tesla stock might endure a sell-off in the next few months especially if the broader markets turn turbulent. But long-term Tesla investors should view every price correction as a buying opportunity.
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