Will the Tesla share price climb continue?

Summary

  • EV manufacturer Tesla’s stock prices have soared in the past year, rising about 8 times since 2020 due to aggressive production expansion plans, investors seeking out high growth stocks during the pandemic and other factors.
  • However, the company’s shares have fallen about 4 per cent in 1H 2021 owing to slowing demand in China and rising competition from domestic Chinese EV makers and also legacy carmakers who have entered the EV space.
  • Despite some negative trends in the short term, due to US and China’s upcoming green measure, demand is expected to be strong in the long term for the company.

Electric vehicle company Tesla Inc (NASDAQ: TSLA) (LON: 0R0X) is the biggest carmaker by market cap in the EV industry as the stock rose by 8 times since 2020. Tesla’s stock price has risen in valuation by about 147 per cent in the last one year to USD 678.9 as of 2 July’s NASDAQ closing price. The stock’s closing price stood at USD 274.316 as of 6 July 2020.

What led to Tesla’s share price rally?

The electric vehicle (EV) company’s sharp rally in stock over the past year has been due to the aggressive expansion of its production capacity, a climate focused government under the Joe Biden administration, the stock market’s expectation of steep growth and investors heavily investing in growth stocks amid the pandemic all helped support the prices to soar.

Tesla’s ramped up its production capabilities in 2019 after setting up a new factory in Shanghai, China producing up to 150,000 cars by the end of 2019 and increasing its capacity by 33 per cent.

Elon Musk founded EV company also upped its expansion plans and increased production capacity by over 60 per cent in 2020 after increasing capacity in its Freemont, California factory and increasing its Shanghai factory’s production capabilities by 3 times its 2019.

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Furthermore, the company expanded its production capacity for up to 1.05 million vehicles in 2021. The company is also set to start production at two new factories based in Texas, US and Berlin, Germany. Tesla has already manufactured 387,000 vehicles in 1H 2021.

Moreover, it is likely Tesla can manufacture about 1 million vehicles as its annualised production rate, when calculated on a run rate basis.

Rising competition and other near term issues

However, despite the stocks’ incredible rally in the past year, Tesla’s stock price has dropped recently, falling by about 22 per cent since 8 February after the company reversed its decision to accept Bitcoin as a form of payment.

The fall in stock prices has been due to slowing demand momentum in China and rising competition In the EV sector. Also, the EV company had recalled up to 285,000 cars in China in late June over safety concerns of its cruise control system.

Tesla’s market share accounted for about 500,000 vehicles sold globally in 2020 compared to a total of 14.5 million light vehicles sold in the US. However, industry research analysts are split on whether the stock will continue to rise. While some analysts expect Tesla to touch about USD 1,000 share price, other analysts have a more tempered view.

Investment bank and research company UBS recently cut its price target for the company from USD 730 to USD 660, citing rising competition from legacy carmakers General Motors, Volkswagen and Hyundai as they are expected to gain market share in the short term.

(Image Source: Refinitv)

In addition to the above challenges, delays across various areas such as Tesla’s Model Y’s European launch, the 4680 batteries, which is a next generation product, and the rollout of full self-driving feature, are some other factors which can impact Tesla’s stock price in the near term.

Long term outlook

Overall the company’s fundamentals are still strong despite some negative trends. Furthermore, due to its recent price correction, the stock is looking more like a growth play due to lower prices compared to its all-time highs.

Tesla is likely to benefit from rising EV sales and expected to gain from the US’ electrification plan worth up to US $174 billion. Tesla is also set to gain from the electrification of China’s auto industry. The EV segment accounts for only about 5 per cent of the China auto industry.

While Tesla will gain from the shift in China’s auto sector, Chinese EV companies such as NIO, Xpeng, Li Auto, and others will also benefit from the same, thus tempering some of Tesla’s market share in the region.

So, while in the near-term Tesla is facing lower demand in China, in the long term, due to federal greening reforms in the US and China’s shifting auto landscape, Tesla will have strong demand in both the US and China and perform better, if it addresses its current near-term challenges.

Also Read: Second high-profile exit: Another Tesla veteran quits

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