Summary List PlacementTesla disappointed Wall Street last week, missing on profit expectations for the fourth quarter even as the carmaker, after a decade as a public company, posted its first full year in the black.
Tesla still made money, and it raked in record revenues — almost $11 billion for the quarter. But the $270 million bottom line was a downer, and it sent shares lower. The stock had been surging toward $900, after a torrid 2020 rally that made Tesla the world’s most valuable carmaker by far and CEO Elon Musk, who owns more than 20% of the company, the world’s richest individual.
By Friday, Tesla was closer to $800, and the rally had encountered its first notable speed bump in quite a while.
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The fourth-quarter financials contained some worrisome elements. Yet again, Tesla sold a ton of emissions credits: $401 million, to be exact, for a total of about $1.6 billion in 2020.
Tesla is the only carmaker that sells a meaningful number of electric cars at this point, so it can monetize all the credits it wants and consider that a legitimate way to garner revenue. But in order to earn those credits, it had to manufacture, at enormous cost, over 500,000 vehicles in 2020. This is not an efficient way to make $401 million.
Every investor wants to pocket some money, at some point
For other reasons — including a rather Tesla-specific one of executives exercising stock options — Tesla saw an additional $3 billion on the topline translate into less on the bottom line than it did in the third quarter. That’s not a trend that investors would want to see persist, as it suggests that Tesla can’t hold the line on pricing and isn’t being disciplined about expanding production capacity.
Tesla also didn’t provide much in the way of 2021 guidance — predictably, as it’s maxed out production at its California plant, is headed in that direction in China, and likely won’t bring plants in Germany or Texas online until later in 2021 and 2022. So the company doesn’t really have a solid sense of how many vehicles it can manufacture this year.
On top of that, Tesla is selling only … four vehicles. And actually, the bulk of 2020 deliveries were of the Model 3 and Model Y, while the more expensive and more profitable Model S and Model X have been fading. So what we have here is a carmaker worth more than the world’s biggest automakers combined making bank on two cars.
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But there is good news! Tesla is horrifically overvalued as a stock, relative to its actual business. The run-up since early 2020 has made it challenging for stockholders to book profits, even if they’re considerable because they could miss out on another massive wave of price-appreciation.
However, every sensible investor wants to pocket gains at some juncture. They simply need an excuse. A few years back, Tesla was so volatile that it was hard to call this shot. Many investors, for example, completely mispriced a decline in 2016, when Tesla merged with SolarCity. The following year saw Tesla shrug off that move, even as the acquisition added billions to Tesla’s debt load.
The setup for seasoned investors
The profit miss last week is essentially the perfect excuse. With $20 billion in cash, Tesla now has a war chest that looks more like a Ford or General Motors, companies that keep a heap of money socked away to defend against market downturns and various fluctuating business conditions, ranging from raw-materials costs to exchange rates to labor disputes — to once-a-century pandemics!
There’s no bankruptcy on the horizon, and the incoming Biden administration is almost giddily Tesla-positive. The Biden Trade alone could drive Tesla toward a $1-trillion market cap in 2021, especially if Tesla gets an extension of a full $7,500 federal tax credit for EVs (Tesla’s began to phase out last year after it sold 200,000 vehicles in the US).
So seasoned investors have an ideal setup: The dip equals completely justified profit-taking while also presenting bulls the opportunity to buy back in either at a discount to the recent rally. Or wait until the stock shakes off the meh Q4 and resumes its upward trajectory, driven by what’s probably going to be the most pro-EV government policy framework in history, in the US, Europe, and China simultaneously.
Tesla’s stunning stock-price appreciation has also made it blissfully easy for the company to use Wall Street like an ATM, raising capital on pretty much whatever terms it wants, whenever it wants. This exorbitant privilege means that an extra $5 billion can be piped into the balance sheet at any time.
That means Tesla can lose money for a year or two and not go out of business — and the stock has climbed so high that even a collapse wouldn’t kill Tesla’s money-raising capability.
The community of Tesla boosters often sees any blip in the company’s remarkable ascent as news to be ruthlessly diminished, but this time around, that attitude would be counterproductive. Tesla had a good, not great, quarter, after an amazing year. Investors urgently needed a whiff of weakness to trim back their risk. And Tesla delivered.
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