How To Play Tesla Following a Q4 Deliveries Beat

The craziest stock of 2020 is off to a crazy start to 2021. Tesla (NASDAQ:TSLA) started off 2021 by reporting 499,550 vehicle deliveries for 2020, missing its target of 500,000. Following the news, practically every stock in the market tanked. Tesla stock gained 3.4%.

Tesla’s stock price detached from reality long ago. But it’s very important for long-term investors to understand what is going on with the company’s fundamentals.

Record fourth-quarter deliveries are certainly good news for Tesla the company. But Tesla’s stock price is now up 1,450% in the past 18 months. The stock has become the latest Wall Street casino, but it won’t stay that way forever. Here’s a look at what investors need to know.

The Tesla Stock Numbers

The first thing I always tell investors to do when it comes to Tesla is forget about the stock’s share price. Forget about the latest crazy things Elon Musk has tweeted. Forget about whether you think Musk is the savior of the human race or the biggest fraud on planet Earth. Forget that he just became the world’s richest person. Just look at the numbers.

Tesla delivered 180,570 vehicles in the fourth quarter, a new record for the company. That total also exceeded analyst estimates of 174,000, according to FactSet.

Beating analyst expectations is always good news for a company. Fourth-quarter deliveries were also up 29.6% compared to the third quarter.

For the full year 2020, Tesla delivered 499,550 vehicles, up 35.9% compared to 2019. Without question, 35.9% year-over year growth is extremely impressive.

Of course, Musk had said the company would “comfortably exceed” 500,000 deliveries in 2020. And don’t just blame the pandemic. On Tesla’s first-quarter earnings call in 2016, he said Tesla was targeting 500,000 units in 2018 and a million units in 2020.

Any Tesla investor that has been around for more than two weeks knows not to take anything Musk says seriously. He famously settled fraud charges with the U.S. Securities and Exchange Commission back in 2018 after seemingly completely making up a Tesla buyout offer.  Musk also claimed in 2019 that there would be a million Tesla robotaxis on the road in 2020. Of course, those robotaxis are nowhere to be found.

Tesla Is Not Like Other Stocks

Deliveries, earnings and margins are the types of things that auto and tech investors typically look at to assess a stock. Unfortunately, Tesla is the exception to virtually every rule in the history of investing. Whatever production target Tesla throws out for 2021 in its first-quarter earnings call likely won’t be achieved. Tesla almost never hits its targets. But investors have known this fact for years now, and they just don’t care.

They also don’t care about Tesla’s stock price. Today’s investors are paying 15x what investors were paying for a share of Tesla stock a year and a half ago. Of course, the idea that Tesla’s deliveries, profits or revenue is 15x greater than it was in 2018 is absurd.

Tesla barely squeaked out enough profits to join the S&P 500 in December. It earned those profits from the sale of regulatory credits, not vehicles.

Tesla’s Valuation

I’ve repeatedly compared Tesla to other auto stocks and other high-growth tech stocks. Tesla stock is grossly overvalued no matter which peer group you compare it to.

Tesla stock bulls argue that its fundamentals will eventually line up with its market cap. But we’ve already discussed the numbers. Microsoft (NASDAQ:MSFT) was one of the biggest winners of the dot-com boom in the late 1990s. It took the stock 15 years to get back to its dot-com bubble peak. How many years of revenue growth will it take for Tesla to justify its nearly $700 billion market cap? Ten? Twenty?

“In the case of Tesla, the firm is now priced as if it is to have dominant position in future automobile market, if not outright monopoly,” wrote Qian Yang, doctoral student in the finance department at Michigan State University, in an email to InvestorPlace. 

Tesla employees and supporters should feel great about the company’s 35.9% production growth in 2020. If the stock weren’t up more than 720% in the past year and trading at 23.7 times sales, I’d say it might make a good growth investment.

J.P. Morgan analyst Ryan Brinkman points out that consensus Wall Street earnings estimates for Tesla through 2024 are actually lower today than they were a year ago, prior to the stock gaining more than 700%.

“Tesla’s performance in 2020 was impressive, but not as impressive as the increase in its shares, which we continue to believe are overvalued,” Brinkman says.

I agree with Brinkman’s assessment that Tesla put up some impressive growth numbers in 2020. Yet his price target for the stock is just $105, about 85% below its current level. That target seems fair to me based on my own comparisons between Tesla and other high-profile tech and auto stocks.

How To Play It

Tesla is a tremendous success story of a company with a stock that has become an internet meme at this point. Never, ever short a stock that is caught in a market bubble like the one surrounding Tesla stock. But there’s absolutely no reason to make a long-term investment in a stock that is so extremely overvalued based on any reasonable future growth assumptions.

There are plenty of fish in the sea and plenty of stocks in the market. Investors should do themselves a favor and stay on the sidelines when it comes to Tesla stock.

On the date of publication, Wayne Duggan did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.

Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. He is the author of the book “Beating Wall Street With Common Sense,” which focuses on investing psychology and practical strategies to outperform the stock market.