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Tesla: What’s coming over the hill for Elon Musk in the S&P 500 and in 2021?

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Tesla Inc (NASDAQ:TSLA) shares are expected to get another power boost when the stock joins the S&P 500 on Monday December 21.


With plenty to look forward to for followers of the company and founder Elon Musk beyond December, we look at what to look out for in the coming 12 months.


Weather for shorts?


With quarterly sales of $8.8bn and a market cap 65-70 times that, there are many investors who think Tesla is massively overvalued and riding for a fall, with the company often called the world’s most shorted stock.


These short-sellers have not had a great year, it has to be said. Tesla short positions lost a combined US$1.6bn in a single day in November, according to data from Ortex Analytics.


Overall, with the price topping US$655, short sellers have now lost a whopping US$28.5bn on betting against the company over the year.


“It’s been painful,” veteran US short seller Jim Chanos, who has been betting against Tesla for five years, recently told Bloomberg, while another UK fund manager and long-time Tesla bear lost his job due to his bad taste in shorts.


But most short sellers have been jumping ship ahead of the S&P 500 debut next week, with numbers hitting a record low for 2020, according to Ortex’s calculations.


“Tesla’s much anticipated entry to the S&P 500 has been closely watched by traders this year,” said Peter Hillerberg, co-founder of Ortex Analytics.


“Our analysis suggests that entry alone could trigger $40bn of buy orders from tracker funds.


“As a result, a large number of short sellers have closed their positions, wanting to avoid the ‘hype premium’ that is so often associated with Elon Musk’s company. However, the battle is far from over, we expect many to be waiting on the side lines looking to pounce when the hype dies down.”


But while down from a peak of 93.6m recorded in January, there are still more than 31mln Tesla shares being shorted.


Another long-time Tesla bear, David Einhorn, has continued to predicted tech stocks will tumble – which is what he hopes as his Greenlight Capital Re fund’s short position in Tesla has weighed heavily on performance. Like the Monty Python’s Black Knight, he will not admit defeat and told investors: “It is our view that we are now in the early stages of the bubble popping.”


Eyes on earnings and targets


One of the first things next year that Tesla followers will be looking for is fourth-quarter numbers, which are due in late January.


For 2020 as a whole, Musk set a target of selling 500,000 cars, having delivered 139,300 vehicles in the third quarter to reach 318,000 for the first nine months of the year.


That quarter market a fifth consecutive period of profits, with revenue of $8.77bn up 39% year-on-year and profits before tax and one-off items of US$331mln.


It looked unlikely that the half a million deliveries could be reached, but some were optimistic, including the analysts at Wedbush.


The Wedbush number-crunchers said a continued surge in demand from China in December could be the key, after roughly 22,000 Model 3 vehicles were sold in November.


“We believe the company is tracking to another strong month of December in China which could be the tipping point to get Musk & Co. to hit/exceed its 500k annual delivery target, an achievement not even on the map for the Street going back to the late spring/summer timeframe,” said Wedbush’s Dan Ives, who lifted his ‘bull case’ scenario for Tesla’s share price to $1,000.


Goldman Sachs also turned more bullish in December, with the Model Y SUV unlocking the door to higher profit margins. This model sells in the $50,000 range versus $40,000 for the Model 3 but the Goldman analysts calculate that it costs roughly the same to build. Forecasting that deliveries in 2021 could be 40% made up of the Model Y, this would boost automotive margins from about 22% this year to nearly 25% by the following year.


Tesla should also be able to deliver around 1mln vehicles by 2022 and 15mln by 2040, the Vampire Squid reckons, with such bullishness resulting in their $4.80 earnings per share estimate for 2021 being over 30% higher than the current Wall Street average.


Elsewhere there remain some investor concerns about the group’s valuation, which recently topped US$600bn – and even Musk admits it’s over the top.


“If Tesla is going to justify its share price it needs to grow really fast, and that means hitting these quarterly production numbers again and again,” said William Ryder, equity analyst at Hargreaves Lansdown. “However, the valuation seems so high that Tesla investors may still wind up being disappointed. There’s certainly no margin for error.”


Launching its fastest car yet


By the end of 2021 Tesla plans to have delivered the first versions of its most powerful vehicle to date, the souped-up version of its Model S electric sportscar.


The Model S ‘Plaid’ will have an estimated range of “more than 520 miles” and a top speed of 200mph from an electric powertrain made up of three motors.


Facing a lot more EV competition


Tesla’s current valuation is “like it’s operating in a vacuum”, an analyst from US broker Roth Capital Partners said recently.


But the big thing next year the amount of competition it is facing will step up a level. And it will increase each year, such that by 2024 there are currently around 400 new models pencilled in to launch. This is inevitable ahead of countries like the UK banning sales of new internal combustion engine cars from 2030 and even some US states going all-electric, such as California in 2035.


For example, Tesla’s Plaid model, before it is even launched, will come up against Porsche’s all-electric Taycan, which is due to start sales in the UK early next year. The Taycan, where the range varies between 250 and 280 miles between existing models, recently set a record lap time at California’s classic Laguna Seca racetrack and so can make the powerful marketing claim to be the “fastest four-door, all-electric sports car”. Musk is said to want this title for the Plaid – something to watch out for next year too. But the Taycan, which some reviewers say is better built and handles better than a Tesla, is likely to be a very popular competitor.


Two upmarket all-electric models are expected to reach showrooms next year: Mercedes-Benz’s flagship EQS saloon and Jaguar’s next-generation XJ in electric-only form, both with ranges just topping 300 miles.


For the average motorist who wants a long-range electric car a lot cheaper than a Tesla, Volkswagen will start selling the next models in its all-electric ID series in 2021, the ID.5 coupe SUV and ID.4 hatchback, which will both offer around a 320-mile range.


Toyota Motor Corp (NYSE:TM), the second-largest carmaker in the world and the company behind the world’s top-selling hybrid, the Prius, is going all-electric too – with the launch of an SUV.


Elsewhere the raft of new models includes a new electric Fiat 500, a Mercedes van, the Hyundai Kona Electric, new Nissan Leaf, Skoda’s first all-electric, Kia’s first bespoke electric car. BMW, Audi, Lexus, Lotus will all be delivering new all-electric models, including direct rivals to Tesla’s offering, with saloons, grand tourers, SUVs and more. General Motors is even bringing back its giant Hummer, but in electric form.


China’s NIO Ltd (NYSE:NIO) was one of the few companies to challenge Tesla in the stock price gains in 2020 as it skyrocketed from $3.24 to above $50, after some sales false starts led to sales in November rising over 100% on last year’s. This has been helped by its innovative approach, such as offering a “battery-as-a-service” programme to cut the purchase price. For 2021, the company is introducing its first sedan model to compete with Tesla’s Model 3, plus is rumoured to be revealing a 550-mile battery at its Nio Day in January 2021, with boss William Li Bin aiming to enter Europe in the second half of next year.


When Tesla launches its Cybertruck in 2022 it will face a lot more competition than Tesla’s earlier models did. Rivals will start staking a claim to this part of the electric market next year, including Rivian’s R1T fully electric truck, in which Amazon and Ford are investors. With 750hp, Rivian claims its truck, which will start being delivered next summer, can get to 60mph in three seconds as well as promising a range of 400 miles on one charge. Look forward to seeing them bedecked in Amazon livery and carrying out some last-mile deliveries in future.


In the field of autonomous vehicles, the most serious competition comes in the shape of Cruise, a subsidiary of General Motors (NYSE:GM). Whereas Tesla is seen only as a “challenger” in the autonomous space, with its cars providing some ‘Autopilot’ features today but with plans for full self-driving capabilities in the future, Cruise is a “leader” in the field, according to analysts at Navigant Research.


Producing the first of its new battery – and facing more battery competition


Based on its recent ‘battery day’, Musk aims to be producing 10 gigawatts of the new larger, more efficient ‘4680’ battery cells before the end of next a year, with full production about three years away.


While the reported launch a new low-cost, long-life battery pack for the Model 3 in China could bring the cost of Tesla’s vehicles in line with petrol-fuelled rivals, potential customers are likely to be distracted by some strong competition across the market next year.


READ: Tesla’s battery ambitions are significant


With its cars generally able to drive close to 400 miles on a single charge, one of the crucial selling points for Tesla has been to eradicate among its customers the “range anxiety” that is one of the top-most commonly cited reasons by consumers not to buy electric.


But as well as the wide array of new EVs coming to the market with ranges that will reduce anxiety for many consumers, there are also other developments that might enable rivals to take a big bite of the market.


Toyota, for instance, is reported to be planning to unveil a prototype of a new battery that can be fully recharged from empty in 10 minutes and offer the potential of 500km electric vehicle trip on a single charge. The Japanese car-maker’s development of a solid-state battery with such specifications could be a game-changer for the automobile industry. Solid state batteries are supposed to have higher energy density, so an improved balance of power and weight compared to one made of lithium cells.


Chinese tech group QingTao will also next year kick off its efforts in solid-state batteries as part of a US$150mln investment in various EV battery developments.


Further forward, Volkswagen aiming to roll out solid-state batteries by 2025.


Maybe moving to North East England?


After difficulties with the construction of a Gigafactory near Berlin, Musk has been encouraged to move the factory from Germany to the Tees Valley, which could be ready to break ground as soon as February 2021.


The mayors of Tees Valley and Hartlepool wrote a ‘Dear Elon’ letter to urge the Tesla boss to choose the post-Brexit North East after delays to the start of construction in Berlin. The area around Middlesbrough offers “hundreds of acres of identified ideal developable land, with the can-do attitude in political leadership necessary to ensure delivery of major projects,” the two mayors said.


Hartlepool had been on Tesla’s shortlist for the factory but just missed out – with Brexit thought to be part of the reason.


More likely to be starting producing elsewhere…


Tesla’s US$1.1bn Gigafactory in Austin, Texas is slated to open around May 2021 and before long start rolling out Model Y cars and even the odd Cybertrucks next year, with volume production of the Blade Runner-inspired behemoth intended to start in 2022.


Having already chopped down a large swathe of Germany’s native pine forest, construction of a sister site near Berlin was recently halted amid over 400 complaints and observations from locals, including from environmentalists concerned about the destruction of habitat of native snakes and lizards.


But this has so far proved only to be a temporary pause and Gigafactory Berlin-Brandenburg is marked down in Musk’s calendar to begin producing the Model Y compact SUV in July and ramping up towards full production of 500,000 cars per year.


“We do expect to start delivering cars from those factories next year, but because of the exponential nature of … the manufacturing plant, especially one with new technology, it will start off very slow at first and then the output will become very large,” Musk said in October, with another 12 to 24 months before the factories reach full capacity.


Musk says the factory will have a dedicated battery manufacturing plant that will be the first to use the company’s new structural battery pack and 4680 battery cells, plus other new technology involved in the making of these models. However, this means production timing is “harder to predict”, he said.


Driving markets (along with the rest of Big Tech)


Whatever Tesla does in 2021, the company is going to be a key element in driving financial markets, let alone the auto industry, says Deutsche Bank strategist Jim Reid, given that the EV-maker’s market cap is larger than the next five largest car companies combined.


“Given its colossal size and that of the tech sector, their paths in 2021 will probably be a big macro driver of markets. Investors in all asset classes might have to assess whether valuations are justified and sustainable,” Reid said.


Its increasingly enormous size could, maybe, unless Musk and co make any serious missteps, make Tesla impossible to catch by its rivals. With a US$5bn fundraising in early December as it reached a new all-time high market cap of around US$616bn, this took its total fresh equity this year to $12bn even though the company has repeatedly said it is already expanding capacity at the fastest speed possible.


With a very marginal dilution impact of less 1%, Tesla’s high valuation “has become a strategic asset” versus other legacy car manufacturers, said analysts at UBS. “None of the legacy players would be positioned to raise such amounts at virtually no dilution. The valuation gap adds to the challenges for legacy carmakers to master the transition to EVs, because the EV (& AV) investments need to be fully financed by the legacy cash flows from [internal combustion engine] cars, which are set to shrink over time.”


…and Musk’s wealth


Musk, who owns around 20% of Tesla shares, in the past year moved up to second in the Bloomberg Billionaires index, overtaking Microsoft founder Bill Gates.


Although he is spending some of his cash on getting to Mars, Musk’s net worth was nearing US$130bn in early December.


A US$3.5bn stock option award in October after Tesla met the target of maintaining a six-month average market value of over $250bn was one of three giant stock option packages that form part of his controversial performance-based compensation plan agreed in 2018.


This 10-year award program could mean Musk is eligible to receive a total of US$56bn worth of stock options over the period if he meets various lofty goals, including growing and maintaining the company’s market cap above US$650bn by 2028, a level that has already been breached.


Cut costs or get ‘hit like a sledgehammer’


It must have been music to the short-sellers ears early in December when Musk told staff that they need to cut costs or the share price could be “crushed like a souffle under a sledgehammer”.


Despite posted five quarters of profits in a row, the South Africa-born entrepreneur sent an email to staff saying: “Investors are giving us a lot of credit for future profitability but if, at any point, they conclude that’s not going to happen, our stock will immediately get crushed like a souffle under a sledgehammer!”


Don’t forget the energy business


Tesla’s automotive arm dominates but its energy business, which encompasses solar energy and battery storage, is not doing too badly and the company is preparing to step up its move into the UK energy market in 2021, having reportedly filed an application for a British electricity provider licence not long ago.


It is already making significant contributions to UK renewable energy projects, but by entering the UK domestic energy market, the company is likely to follow the model it has used in Australia. This involves supporting the grid with its battery technology and its Autobidder energy management software. This set-up means it sits between energy producers and households, allowing people to switch their energy tariffs automatically onto the cheapest renewable source, based on the market price. This sort of localised power setup is just the ticket for the new regulatory regime, according to Ofgem’s latest declaration.


In the third quarter of 2020, the company, which sells varying sizes of domestic and industrial battery, from the wall-mounted Powerwall up to the Powerpack and Megapack, shipped 759 megawatt-hours worth of batteries, an 81% increase from the second quarter.


In the past year Tesla also unveiled a project for its ‘solar roof’ to power a new suburban housing estate in Mississippi, linked to the company’s Powerwall batteries and other energy efficient equipment and appliances. Construction is scheduled to begin in early 2021.


The energy piece could eventually be worth $500bn alone, Goldman Sachs reckons, based on extrapolating Tesla’s North American opportunity to the rest of the world, based on selling 5mln solar roofs and Powerwalls a year – even though 5mln rooves would represent the entire annual US replacement market plus new homes.


Musk’s SpaceX will also be busy


Away from Tesla, finally, and Elon Musk privately owned aerospace business, Space Exploration Technologies Corp, or Spacex, has been holding talks with investors about a new fundraising, after drumming up over US$2.4bn in 2020 and on track to have completed 25 orbital launches by the end of December.


The rocket company’s valuation in August was put at US$46bn as 75 investors bought shares.


Musk recently said SpaceX could send its first uncrewed spacecraft to Mars by 2022, with astronauts flying to the red planet within the next four to six years. Noting that trips to Mars depend upon a two-year cycle of the planet’s orbit lining up with Earth’s, he said the next windows were in 2022, 2024 and 2026.


He said he was “highly confident” of SpaceX astronauts flying to Mars in 2026. “If we get lucky, maybe four years. And then we’re going to try and send an vehicle there in two years,” he said.


Closer to our home planet, there is plenty on the horizon for SpaceX, including the first orbital flight of the fully reusable Starship and several launches of its Falcon 9 rocket in the first quarter alone, including various ‘rideshare’ missions and to deploy the company’s Starlink mini satellites. Starlink’s internet service will begin wide-scale public beta testing in late January or early February 2021.


For October, Musk is even aiming to race a pair of remote-controlled cars on the surface of the Moon, with plans to launch the vehicles aboard a SpaceX Falcon 9 rocket and carried to the moon in a Nova-C lunar lander made by another company called Intuitive Machines.


Boring!


Musk other side-project, the Boring Company, in December was given approval to extend its big tunnel under Las Vegas, known as the Vegas Loop project.


While the Boring Co is focused on its mass-transit Hyperloop idea, the Sin City project is in construction with the aim of, get this, allowing cars to drive underground between various casinos and resorts with The Strip, local sports stadium and local airport. Maybe the traffic there is especially bad.


Next year may bring some more excitement for the Boring team, with permission pending for two major projects: one is a similar tunnel to give baseball fans and concertgoers a short-cut under Los Angeles to the Dodger Stadium from East Hollywood, the other is a proposed Loop autonomous vehicles transport system on the East Coast, connecting downtown Washington DC to Baltimore.

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