Stock of the Week: Tesla

Tesla shares are up nearly 600% this year but can the EV car maker live up to the market's high expectations?

James Gard 26 November, 2020 | 10:05AM
Facebook Twitter LinkedIn

Post-It Note

Tesla (TSLA) has been one of the most talked about (and most traded) stocks this year and has come to represent the tech-driven recovery in 2020. Its shares are up more than 500% this year. So inevitably, given a choice between Tesla and some more old-school automotive names like Ford and VW, our Twitter followers have chosen Tesla as stock of the week.

What else can be said about Tesla? Let’s start with valuation, which is why investors large and small have got so excited about the stock this year – and why founder Elon Musk has just surpassed Bill Gates as the second richest man in the world. The shares, which will be included in the S&P 500 from December, were worth $83 at the start of 2020 and have now hit $550 (after a recent stock split), a gain of 560% in a pandemic year.

Morningstar analysts have recently awarded the company a narrow economic moat for the first time, and say shares are now worth $319, up from a previous fair value estimate of $195. Analyst Dave Whiston says some of this upgrade is due to the company gaining a moat for the first time and partly due to upgraded production forecasts - Tesla is now expected to make 22.7 million electric vehicles by the end of 2029, an increase of 37%.

Tesla Leads the EV Revolution

Tesla’s breakthrough, at least in share price terms, came in July when it revealed a $100 million profit in the pandemic-stricken second quarter, which meant for the first time it had made a profit for four consecutive quarters.

Whiston says the market valuation reflects Tesla’s future promise of becoming the biggest electric vehicle maker in the world, but warns that mass-market success will not come this decade for a simple reason: price. “Tesla's product plans for now do not mean an electric vehicle for every consumer who wants one, because the prices are too high,” he says. Indeed, the Tesla model S retails for more than £70,000 and the model X for more than £80,000 in the UK, which means it competes in the luxury car sector. The model 3 costs a more modest but still sizeable £39,000.

Tesla share price

But Tesla doesn’t just make electric vehicles – after all, established car makers such as VW have built production capacity in EV – it also makes electric vehicle batteries and solar panels at its so-called “gigafactories” in Shanghai, Berlin and the US.

For an ESG investor, this seems a straightforward proposition. But Morningstar analyst Tancrede Fulop notes that Tesla actually has a high ESG risk, according to Sustainalytics, and has attracted controversy, particularly in the “S” and “G” of ESG. For example, Tesla workers at its California factory remained onsite during the height of the Covid-19 pandemic, against state guidelines at the time. “Its management of human capital and product governance risks reveals significant shortcomings,” Sustainalytics notes. “Tesla has been involved in repeated incidents related to the timely delivery of its cars, the safety of its autopilot technology and the management of its workforce.”

Can Tesla’s momentum continue? William Ryder, equity analyst at Hargreaves Lansdown, says the firm’s gains this year will make it tougher to meet already ambitious targets:  “If Tesla is going to justify its share price it needs to grow really fast, and that means hitting these quarterly production numbers again and again. However, the valuation seems so high that Tesla investors may still wind up being disappointed. There’s certainly no margin for error.”

While the managers of the Gold-rated Scottish Mortgage Trust (SMT) have this year reduced their weighting to Tesla by 40%, they are sticking with the company. Co-manager James Anderson said in a recent update that “Tesla has made significant operational progress” and demand for its products remains strong. On the passive side, Tesla makes up 1% of the four-star rated BlackRock US Equity Tracker Fund, which in October received more than £7 billion in inflows, according to Morningstar Direct data.

Morningstar Investment Conference 2020

Catch Up Here

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Facebook Twitter LinkedIn

About Author

James Gard  is content editor for Morningstar.co.uk