To reach a share price of $2,000, Tesla (NASDAQ: TSLA) needs to increase its share price by almost $600 a share, a jump of some 40% as of July 27. This is a tall order under normal circumstances, never mind given the year that’s in it. Nevertheless, even as other carmakers clamor for government help, Tesla’s deliveries fell only a modest 5% year on year, with exports to China and other markets making up for weak domestic demand. On the other hand, General Motors (NYSE: GM), Ford Motor (NYSE: F), and Fiat Chrysler (NYSE: FCAU) each reported a sales decrease of 30% or more in Q2.
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Early last year, Tesla was struggling, no doubt about it. Losing $862 million in 2019, it looked as though the rising star of the electric automotive sector had gone as high as it was going to get. It looked as if it was about to fade into the background to the soundtrack of Elon Musk firing tweet after offensive tweet into the digital void. In contrast to early 2019, Tesla’s Q2 report in 2020 trumpets a 5.4% operating margin, making Q2 2020 a fourth quarter of sequential profitability.
The China Factor
A major force driving this new profitability is the fact that the company’s Chinese factory, Giga Shanghai has been brought to bear. China is the world’s biggest market for electric cars, air quality concerns in its crowded megalopolises being a major factor in the popularity of electric vehicles. Having a production base in China has allowed the U.S. carmaker to avoid hefty Chinese import taxes and duties, making it much more competitive, not to mention avoiding transport costs. The factory became operative in late 2019, delivering its first 15 cars on December 30, 2019, symbolically to Tesla employees. The annual production capacity at Giga Shanghai is some 250,000 vehicles, a very comfortable amount of growing room.
The Musk factor
Tesla CEO Elon Musk is a charismatic figure whose self-confidence and, some would say, diligence have done a great deal to propel the company onto the scene. However, he has not only courted controversy, but he has dove full-speed into the face of it, declaring Twitter (NYSE: TWTR) to be a war zone. A war zone where he fights on several fronts at the same time. From calling a rescue diver a pedophile for no reason, to getting in frequent fights with strangers on the internet, he is not the most level-headed manager out there. But much, much more worrying for potential investors than issues such as these is his propensity to wipe huge amounts of money off Tesla’s market value with his social media antics. For example, tweeting “tesla stock price too high imo” wiped $14 billion off the company’s value as investors bailed. His tweets have gotten the company in financial trouble in the past too when his ‘420’ jokes, a reference to marijuana culture, landed them with a $20 million fine.
Tesla has shown impressive resilience in the face of difficult market circumstances, outshining traditional automotive competitors, and staying at the top of the electric vehicle sector. However with Elon Musk at the helm, even if the share price were to reach $2,000, there’s no telling if he might not undermine all the hard work with a reckless tweet. I wouldn’t be betting on the stock as a stable place for money until they ban his Twitter handle.
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Contributing Writer at MyWallSt
Ronan is an admirer of companies like Patagonia, who combine style with functionality, and a pioneering approach to mitigating their impact of society and the natural world.