Tesla being Robust against the Bear Market
Tesla represents a holding opportunity as COVID-19 hasn’t diminished the allure of big tech stocks. The market volatility due to COVID-19 has crushed the share in the bear market from ~61% off its all-time highs of the S&P 500 in February to the March low. However, Tesla has rebounded robustly, up 78 % since the mid-march. Tesla is well protected given its diversified global operation and high level of integration, driving upside potential on topline performance and margin improvement. At the moment, Tesla’s stock price is USD 686, which is still higher ~34% higher from its median price target of 500.
Tesla is the market leader in battery-powered electric vehicle (EV) industry, owning around 60% of market share. Strong organic demand on Tesla’s flagship product Model 3 in 2019 makes Model 3 takes over 80% of Tesla’s sales volume and over 50% of the U.S. EV market. Tesla is now with a market capitalization almost double the combined value of the top two U.S. auto giants General Motors and Ford.
Tesla is now facing potential disruptions related to COVID-19. Investors are recommended to focus on both the financial and operational risks. For the financial risks, investors may consider the duration and severity of supply as well as manufacturing. A stress test can be run to test the balance sheet. However, Tesla’s achievement on strong cash generation, by producing $1.1B of free cash flow for 2019, makes it still attractive in the bear market environment. Tesla’s delivery of 88,400 vehicles in 2020 Q1 shows demand remaining strong despite the coronavirus. Globally, Tesla expands its manufacturing chain in China. Increasing build rates in Gigafactory Shanghai, which continued to achieve recorded levels of production in 2020 Q1, allows Tesla to increase its revenue growth through higher vehicle deliveries. From the operation perspective, investors may consider social risks such as execution risks as a result of remote working and volatile markets. In the longer term, Investors may also keep eyes on potential new competitors which may be better-capitalized technology firms.
*This pitch is as of the date since Tesla stock price fluctuates with historical volatility (close-to-close) of 0.9 for 2020 Q1.
Bibliography
Mackintosh, James. “How to Play Coronavirus Bear Market? Exactly Like the Bull
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“Morningstar, Inc.” Morningstar, www.morningstar.com/stocks/xnas/tsla/quote.
“Tesla Q1 2020 Vehicle Production & Deliveries.” Tesla, Inc., ir.tesla.com/news-
releases/news-release-details/tesla-q1-2020-vehicle-production-deliveries.
The Complete Toolbox for Investors, finbox.com/NASDAQGS:TSLA/explorer/wacc.
