TSLA: Will Tesla Stock Be Valued at $1 Trillion By End of 2021?

Right now, there are five publicly traded companies in the world that have a market cap of over $1 trillion. According to this report, Saudi Aramco leads the race with a market cap of $2.1 trillion, closely followed by Apple (AAPL) at $2.09 trillion. The other trillion-dollar heavyweights are Microsoft (MSFT), Amazon (AMZN), and Alphabet (GOOGL).

There are several other companies that are on the threshold of entering the trillion-dollar club. These stocks include Facebook (FB) and China-based Tencent and Alibaba (BABA).

However, another company that has outperformed all other companies mentioned above in 2020 and could reach a trillion-dollar valuation is electric vehicle giant Tesla (TSLA).

Tesla stock has gained a staggering 580% year-to-date and has returned 8,700% in the last 10 years. These impressive returns have meant the company is currently valued at a market cap of $539 billion.

And according to Wedbush analyst Daniel Ives’ bull case scenario Tesla stock may breach the $1,000 mark in the next year due to a major inflection in global EV demand.

Let’s take a look at what will drive the EV maker’s stock price higher.

Tesla has multiple tailwinds

Tesla is part of a high growth industry that is still at a nascent stage. The transition towards EVs is expected to gain pace in the upcoming decade which means Tesla can leverage its leadership position to dominate this market over the long-term. EV sales might account for 10% of auto sales in 2025, up from just 3% in 2020.

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Similar to most auto manufacturers, Tesla’s deliveries fell 5% year-over-year in Q2 due to the pandemic and the shutdown of its factory in California. However, deliveries were up 44% year-over-year in Q3 and soared 24% in the last 12-months.

Tesla has expanded its annual production capacity from 440,000 units in 2019 to 840,000 units at the end of September. This capacity expansion is expected to support demand for the Model 3 as well as Model Y vehicles.

Tesla’s growth in top-line has also helped the company swing from a negative cash flow position last year to a positive cash flow in 2020. In Q3, Tesla generated $1.4 billion in free cash flow. It has now posted a net income for six consecutive quarters and will soon be part of the S&P 500 Index by the end of 2020.

Tesla’s journey to $1 trillion will be volatile

Tesla’s huge market opportunity and stellar performance over the years has driven its stock price higher. Its stellar performance and leadership position has been recognized by the market but it also means the company remains vulnerable in a broader market sell-off.

It will have to execute impeccably on expansion plans going forward, and any miss in earnings or revenue will not go down well with investors. Tesla has a first-mover advantage but the EV space is expected to get crowded as traditional automakers will also start manufacturing hybrid or pure play electric vehicles.

Another speed bump for Tesla is its lofty valuation. Its price-to-sales multiple of 17.4x and its price to earnings ratio of about 1,100 is sky-high. Alternatively, the company is forecast to increase sales by 36% in Q4 and 45.2% in 2021 while earnings growth is forecast to rise 73% next year.

The verdict

We can see Tesla stock is expensive and could be due for a correction in the near-term, and I believe it will be challenging for the company to reach a $1 trillion valuation in just 12-months time. However, Tesla has multiple secular tailwinds that will positively impact revenue growth over the long-term. Therefore, I don’t it’s not a question of how but rather a question of when Tesla will reach the trillion-dollar market cap.

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TSLA shares were trading at $585.60 per share on Thursday morning, up $16.78 (+2.95%). Year-to-date, TSLA has gained 599.93%, versus a 15.67% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditya Raghunath

Aditya Raghunath is a financial journalist who writes about business, public equities, and personal finance. His work has been published on several digital platforms in the U.S. and Canada, including The Motley Fool, Finscreener, and Market Realist. More...