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Tesla (NASDAQ: TSLA) stock  starting from $250 per share to about $350 per share, marking an increase of about 40%, driven by the company’s expanding production capabilities, improved cost management, and strong product pipeline, which should enable it to post relatively sustained profitability starting from 2020. This current price estimate values the company at about 60x its projected 2020 earnings. That said, they are continued to believe that Tesla is overvalued. The current market price of about $450 implies that the stock trades at over 75x projected 2020 EPS.

Reasons For TSL Price Increase

This multiple is high considering the mounting competition in the EV market from mainstream automakers, potential risks to the global economy that could hurt broader auto sales, and concerns relating to the timing of the company’s Chinese production debut, as electric vehicle sales in China have been on the decline in recent months. There are some of the key reasons for NASDAQ: TSLA  at is price increase:

  • Tesla’s deliveries have recorded strong growth over Q4, rising by 23% year-over-year to a quarterly record 112k units, beating estimates, and enabling the company to make good on its promise of delivering over 360k cars over 2019.
  • Tesla has also made good progress on the cost front, improving its gross margins in recent quarters on account of higher volumes which have helped fixed cost absorption and lowered labor hours per vehicle. The company is also scaling back on its operating expenses.
  • Production will expand further, as the company has commenced production at its factory in China ahead of schedule. The plant, which will produce 250k cars a year over the first phase, is likely to turn profitable relatively quickly, as CapEx for Model 3 per unit in China was 65% lower compared to the U.S.

Tesla Valuation

  • Total Revenues have increased from $7 billion in 2016 to $21.5 billion in 2018, and are expected to stand at $29.3 billion in 2020.
  • The improvement will be driven primarily by higher Automotive Revenues, with the ramp-up of the Model 3 sedan and production from Tesla’s Chinese plant.

Net Income

Tesla has remained loss-making, with Adjusted Net Income standing at -$0.4 billion in 2016 and -$0.2 billion in 2018. They are expecting the company to post a net profit of $1 billion in 2020. The improvement will be likely to come from higher Revenues as well as improving Net Margins, as automotive revenues are likely to scale up faster than operating costs.

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