Tesla trade idea

With positive numbers shown during their Q12020 results, Tesla has certainly gained confidence amongst investors worldwide. But is the company overvalued? Will the company still be able to sustain the positive results going forward? In this article, we will deep dive into the various aspects of Tesla, including its fundamentals, its competitors within the industries, and the Plug-in Electric Vehicle (PEV) market .

The reasons why Tesla may deserve a high valuation

1. While the PEV market accounts for only a small portion of the overall automobile industry, Tesla’s performance claims to prove otherwise.

In 2019, the PEV takes up about approximately 2.5% of the market share in the overall automobile industry. Though production of PEVs have been rising in the past few years, consumers have not opted for the plug-in electric vehicles when they are buying a new car. Despite the small PEV market share, Tesla has been in the forefront of the industry, taking almost 20% of the electric vehicle market share with its best-selling Model 3 that has sold double or quadruple times more than their other competing models. What is worth noting here is that the triumph of Tesla’s Model 3 does not come from a price comparative advantage since they are priced much higher than their competitors like Nissan Leaf and BAIC EU-series. The strong brand recognition amongst global consumers alongside its prestigious quality were key attributors to the high sale volume. Tesla generated USD 25 billion in revenue in 2019 despite entering a much smaller PEV market and is almost 10% of the giant Toyota’s 272 billion revenue in the same year.

Global PEV Model by deliveries in 2019

2. Increased production with the advancement of technology. Tesla has been in the forefront technologically in the PEV space and for the overall automobile industry.

Toyota engineers recently told the market that Tesla’s processing chips and electronics are ahead of the other major automakers in the likes of Toyota, Nissan, and Volkswagen by at least six years. The car chips have enabled Tesla’s vehicles to continuously stay at the top of their game of the autonomous driving technology and it is no wonder how Tesla has attained such high valuation with this comparative advantage.

On top of that, SpaceX’s successful rocket launch has given a further boost to Elon Musk’s credibility, triggering Tesla’s share price to rise by almost 8%. With the extreme tests and the constant push of boundaries of the automobile industry, it is definitely no wonder why investors see Tesla as a strong contender within its own space.

3. Strategically shifting production to Shanghai Gigafactory and increasing focus on the China market has harvested early success.

The PEV market in China is much more dynamic and promising as compared to the other major economies including the US, Europe and Japan. China is now showing more than 50% increase in annual sales of electric cars and the world PEV growth shows some reliance on the Chinese market. The current market share of existing electric vehicles in China is over 5% and new sales of PEVs are expected to comprise of about 7% of the total new automobile sales in China by the end of 2020.

Against the backdrop of the robust growth in the Chinese PEV market, Tesla has delivered strong performance after establishing Shanghai Gigafactory at the end of 2019. The facility is currently producing final assemblies of the Tesla Model 3 and at a rate of 3000-4000 cars in a week.

Between January to May 2020, the Model 3 sold to the Chinese markets amounted to over 32,000 units, making up nearly 2.5 months’ supplies of Model 3 that were produced in the Shanghai factory.

Amid the coronavirus pandemic that caused a slowdown in Tesla's overall deliveries, Tesla adapted and change their strategy to reduce production in the more expensive and high-end model S&X, and ramped up the supplies for their cheaper model 3&Y. This resulted in Tesla delivering a net profit in Q1 for the first time in history.

Tesla 2020 Production Capacity

Is Tesla overvalued?

Competitor and technical analysis

Tesla has shown robust growth in sales and has attained a large market share within the PEV sector. Investors may also have overvalued the stock based on the estimated potential of Tesla’s advanced technology That aside, Toyota has one of the largest market penetration globally and has been being one of the best in terms of sales performance within the automobile industry. Comparing with BYD, it is reasonable to give an upper hand to Tesla given its superior brand credibility and forefront technology. However, with a price tag of USD 1000 per share, and with the current price to sales ratio of Tesla, the sales of Tesla needs to be at least triple to reflect the high valuation at the moment.

Risk management is vital to protect your trades

Possible risks when trading Tesla

The fear that there might be a second wave of coronavirus may again take a grave toll on the supply chain. If that happens, Tesla may lack the necessary components to sustain its current production rate. The resurgence of lockdown and social distancing policies may cause consumption to slump again, making the demand for Tesla vehicles to drop and this will impact Tesla’s revenue growth for the remining months of 2020.

How to manage your risk?

Investors should always set a percentage to stop their losses (typically a 10% of the buying price). If the short term moving average line (e.g. 20-day) cross from above the long term moving average line (e.g. 60-day), it is possible that the stock price will continue to drop. It is strongly recommended to place a guaranteed stop to ensure that your trades are closed out at the level that you are comfortable with without any loss due to market slippage.