Tesla, the gift that keeps on giving

2020 was not a great year for many businesses, although one that has clearly had a better year than most is Tesla. The share returned 743% over 2020 (even Bitcoin would blush at those figures), was included in the S&P 500 index and is now the 6^th largest publicly traded company in the US by market cap – and it’s showing no signs of slowing down. Tesla will post its financial results for the fourth quarter and full year ended December 31, 2020 after market close on Wednesday, January 27, 2021. My colleague Chris Weston has written a good general overview for Q4 earnings season here .The below image contains some of the key metrics traders should keep an eye on. Tesla has a record of having beaten both its EPS and Revenue consensus estimates 5 of the last 8 quarters. 

Source: Bloomberg

Beyond Tesla's financials, investors will be listening closely to guidance for 2021 deliveries. Expectations are lofty given construction of new factories and the addition of new products. Tesla came in just under 500k deliveries for 2020 (36% growth YoY) so around 750k for 2021 under more normal conditions would be well received by the market (50% growth YoY). Deutsche Bank recently raised its 2021 delivery forecast from 775k to 800k. How fast the Cybertruck and Semi models come onto the market will also be an important nugget of information.

Telsa’s EV business is just the icing on the cake as the software as a service (SaaS) internet of cars (IOC) ecosystem presents Tesla with massive optionality. Their energy division is also exciting. Musk has stated previously that this part of the business is 'poised for growth', and in time it will be as big as the vehicle division. Solar roof deployments have accelerated rapidly and momentum looks likely to continue. Tesla seems to be meeting their delivery targets and shows how well they were able to scale up their production. Q3’s results showed Tesla had $14.5 billion in cash on its balance sheet with forecasts for over $20 billion by year-end. This will most likely be deployed into increasing its production capacity further, R&D and expanding its product range. Tesla gross margins in their auto business are chunky even when compared with other premium car companies. These margins could expand further due to their advantage from scale which will translate into lower costs. Being a cost leader allows Tesla, by price cuts, to expand the addressable market and capture more of the entire mobility market worth around $10 trillion.

The other macro tailwind which will help propel further demand for Tesla shares is the ESG investment theme which is gaining incredible popularity, especially amongst the Millennial cohort. Joe Biden has big plans for investing in more climate friendly infrastructure and most likely regulation which works in Tesla’s favour. Having gained entry into the S&P 500, it will also benefit from tracker funds buying Tesla shares to meet their mandates. Lastly, Musk has positioned himself in a fast growing market like China and currently has a market share of 20% of all electric vehicle sales in this region.

Now that I’ve laid out the bull thesis I would feel remis if I didn’t provide an alternative view. The valuation for Tesla is certainly not on the cheap side – that’s putting it politely. For example it trades at around 28x sales compared to the rest of the auto industry around 0.35x. The company is very reliant on the sale of regulatory credits in order to achieve profitability. Michael Burry well known for shorting the housing market during the GFC has a large short position on Tesla. Make of that what you will. 8% of Tesla’s float is currently short. Apple is also now sniffing around the car industry and one has to wonder could Tesla become the Blackberry of the auto industry or will it be more like Samsung when Apple enters in a few years. Tesla shares slipped on Thursday morning after the NHTSA asked the automaker to recall about 158,000 Model S and Model X units that could potentially suffer from failing display consoles which raised safety concerns.

Owning Tesla shares is a wild ride. The average price change on the day of reporting is 6.8% with option markets implying a 9.1% move. From a technical analysis perspective, price action is currently forming a triangle pattern with a breakout either side to occur soon. The buildup to earnings and general market risk-on/off will be the catalyst behind the breakout. If price were to correct to the downside, support would be around $770-800 (uptrend line). The next major support is around $655 and then below that at $600 (50-day SMA yellow line). Targets to the upside would be around the previous high of $884 and the round number of $900. The RSI looks like its rolling over from overbought territory.