Tesla shares are up 9% today following a 34% move over the previous month. This most recent share price surge is attributed to a combination of two factors, short-covering and greater investor optimism regarding Tesla’s 2020 demand. We continue to expect shares to be volatile in the years ahead but, ultimately, trend higher given the company’s pole position in undeniable truths related to electrification and autonomy.
Short Covering Continues
The controversy regarding the Tesla story is far from over. While the company is no longer at risk of running out of money, the debate around justified market cap continues, given the company is now worth more than Ford and GM combined. The timing of EV adoption, profitability, Elon Musk’s suitability as CEO, and competition continue to be relevant to the Tesla investing conversation. We were surprised to find recently reported trading data in the month of December that short interest only decreased from 15% to 14.3% as Tesla shares increased 17% from 12/13 to 12/31. In other words, contrary to our earlier belief, much of the move in December appears to be related to an increase in long shareholder positions vs short covering. This 14.3% short interest remains higher than typical tech stocks of 1-6%. Given the trajectory of today’s gains, it is likely that short covering is the primary factor in the move.
Greater Investor Optimism Regarding Tesla’s 2020 Demand
Investors are reevaluating their expectations for 2020 deliveries (driven by China Giga potential). On the positive side, the company delivered more vehicles than expected in the Dec-19 quarter, suggesting underlying demand for EVs is increasing. On the negative side, 2020 will face the headwind of Tesla’s $1,875 US EV tax credit disappearing, along with the Mar-20 seasonality headwind. We believe the ending of the EV tax credit will have a dampening but manageable impact on demand. Overall, we continue to believe that the company will exceed Street expectations of 463k deliveries in 2020. As for March seasonality, last year’s pain has the potential to be this year’s gain. Specifically, Mar-19 deliveries of 63k were below 87k in Dec-18. If deliveries decline sequentially by less than 28%, one could build an argument that the demand outlook is improving on a year over year basis.
Is This Move Justified?
There is a euphoric atmosphere around shares of Tesla which often results in sharp near-term declines. We believe there is a risk to such declines in the near-term, but the magnitude is difficult to predict. Longer-term, the central question is, what value should be attributed to a leader in the future of transportation? Ultimately, that valuation needs to be grounded in consistent earnings, something that may be years away in the Tesla story.
The Tesla valuation exercise is similar to that of Amazon in 2010. At the time, Amazon had sporadic earnings, but a large addressable market in front of it. Investors opted to give Amazon the overwhelming benefit of the doubt that, eventually, they would deliver on consistent earnings with a goal of 10% operating margin. That operating margin target has not materialized but the revenue growth has. The market value of Amazon has increased from $59B in 2010 to $938B today (Jan 1, 2010 – present). So, is Tesla over- or undervalued? The simple answer is: if investors continue to give a handful of companies the benefit of the doubt on capitalizing on undeniable emerging trends, Tesla’s market cap will likely move higher than its current $94B over the next five years.