Has Tesla Finally Turned The Corner After A Tumultuous 2019?
Investing.com | Jan 06, 2020 20:34
Electric carmaker Tesla (NASDAQ:TSLA) had a dramatic turn fortune in the final quarter of 2019. After reporting a surprise third-quarter profit in October, its shares have been on a tear, surging about 75% since then.
And the good news for Tesla bulls is that the rally has been given a fresh impetus at the start of the new year. The company announced last week that it delivered a record 112,000 vehicles in the fourth quarter and has begun production at a new factory near Shanghai where it is building 1,000 Model 3 sedans a week.
Indeed, shares have rocketed up more than 34% in the past month, and almost 7% in the last three sessions alone, to close on Friday at $443.01.
Both developments came after a very unsettling year for Tesla that shook investors’ confidence in the company’s founder and CEO Elon Musk, who stunned shareholders with a plan, ultimately abandoned, to take the company private. These missteps, along with a raft of broken promises, forced many top analysts to downgrade Tesla’s stock and even question the seriousness of Musk’s mission to disrupt the traditional auto industry.
For Tesla bulls, that ambitious goal suddenly looks within reach after recent breakthroughs. The completion of Shanghai’s “gigafactory” factory in less than a year and the company's success in exceeding its ambitious goal of selling 360,000 vehicles for the year are a powerful sign that Tesla could rapidly become a meaningful industry player if it continues to meet its targets.
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“2020 represents a pivotal year for Musk & Co.,” Dan Ives, an analyst for Wedbush Securities, said in a note to investors on Friday.
“This will be the year the bulls have been waiting for with China coming on board and Musk’s grand [electric-vehicle] vision starts to potentially take hold.”
For Ives, China remains the major “swing factor” where Tesla has started local deliveries of China-made Model 3 compact cars. There, it is also getting ready to start production of a new Model Y compact sport-utility vehicle in the summer.
Despite this optimism, it’s not clear whether China will quickly become a profitable venture for Tesla. Electric vehicle sales have been weakening over the past several quarters in China as the government rolls back subsidies on alternative energy vehicles.
A slowing car market in China, the elimination of U.S. tax credits for Tesla buyers and the risk of Musk falling short again on his promises are some of the major obstacles that could decelerate the stock's rally in 2020. It's worth recalling that the company had a similar strong finish to 2018, but produced massive losses for shareholders in the first half of 2019.
In order to solidify its position, Tesla must show in the next few quarters that it can translate all these gains into generating consistent, free cash flow and start cutting its debt. But the problem with the company's stock is that it reacts too wildly to any bad news, making it a favorite target for speculators.
Unimpressed by Tesla’s spectecular rally in Q4, Morgan Stanley reiterated its $250 price target on the company just last month, saying the current valuation can’t be sustained. Analyst Adam Jonas said in a recent note that investors will eventually cease to view Tesla as a tech company and send the stock plummeting to levels comparable to others in the auto industry.
“We are not bullish on Tesla longer term, especially as, over time, we believe Tesla could be perceived by the market more and more like a traditional auto OEM,” Jonas wrote.
“We are prepared for a potential surge in sentiment through 1H20 but question the sustainability.”
Tesla last traded around the $250 mark in October last year.
Bottom Line
There is little doubt that Tesla is back on track after ramping up its production and building a factory in China that could prove a game-changer for the company’s long-term profitability. But the trail-blazing automaker needs to be quick to show that all these milestones are helping the company to reach sustainable profitability and that the good times are here to stay, unlike so many of its previous boom-and-bust cycles.
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