With two weeks remaining in Q2, all eyes are on Tesla (NASDAQ:TSLA) and the company’s electric vehicle (EV) production and delivery numbers this quarter. Channel checks point to strong demand, with Tesla having already sold out production capacity. Still, tensions run high. TSLA stock has pulled back 13% year-to-date on production concerns, industry-wide supply constraints and increasing headline risk from competitors.
Can Tesla beat its own “personal best” and produce over 185,000 EVs this quarter? The company is going full throttle, so to speak. Recent reports confirm that CEO Elon Musk asked Tesla employees to go “all out” for the company’s end-of-quarter delivery and production push.
While opinions differ on Tesla’s valuation and growth trajectory, one thing is clear: production numbers will be highly scrutinized, setting up for an inflection point in Tesla stock.
Here’s a closer look.
TSLA Stock: Not All EV Manufacturers Are Created Equal
If the last few weeks have taught us anything, it’s that EV stocks are binary: there’s a clear line that’s drawn between winners and losers. On one side of the equation are EV companies whose credibility and overall viability are clearly in question, as evidenced by management departures and recent SEC investigations. Other EV stocks (Tesla included) are commanding red-hot valuations.
Last week alone, two pre-revenue and pre-production EV companies experienced very different outcomes. For Lordstown Motors (NASDAQ:RIDE), the story may be over. The company missed its targets on costs and production, admitted it overstated pre-orders, told investors it didn’t have enough money to start full production and parted with its CEO and CFO.
But for other EV startups, such as Lucid Motors, things could just be getting started. Last week, an S-4 from Churchill Capital V (NYSE:CCIV) valued Lucid Motors at $38 billion. While the musings around the next “Tesla killer” have certainly grabbed headlines and investor imaginations lately, anyone actually doing the math can see it’s a pretty rich valuation for a company with no revenue or volume commercial production.
Money Flow, Future Growth Potential, Keeps Valuations in Orbit
When it comes to EV sector valuations, this disconnect between fantasy and reality has some investors wondering if a broader correction is imminent. For now, the market seems more focused on a future growth narrative than present fundamentals. As a result, EV valuations have held fairly steady. Lordstown, semi-truck maker Nikola (NASDAQ:NKLA) and electric-car maker Canoo (NASDAQ:GOEV) are all trading in line with, or above, their SPAC (special-purpose acquisition company) IPO prices. That’s despite several red-flags, including questionable viability, SEC investigations and management housecleaning. The Global X Autonomous & Electric Vehicles ETF (NASDAQ:DRIV) is up 13% over the same period, mostly due to renewed strength among component suppliers.
Tesla and the company’s Chinese EV counterpart Nio (NYSE:NIO) are outliers, both down 13% year-to-date.
Tesla: Bucking the Trends
While TSLA stock has rebounded from recent lows of $550, the stock is still down from January highs of over $880. If delivery numbers outperform this quarter, the stock could see a return to these levels very easily.
Using history as a guide, it’s clear to see that Tesla has established a recent pattern of outperformance. Despite a production pause during the pandemic, Tesla almost delivered 500,000 vehicles in 2020. That represents 36% year-over-year growth. For 2021, the EV maker expects deliveries to grow even faster than they did in both 2020 and 2019. For the full year, Tesla is expected to exceed 800,000 EVs — an over 50% increase from 2020 levels.
Last quarter, analysts didn’t expect Tesla to beat numbers, especially in a seasonally soft quarter. But the company did, anyway, posting a 109% year-over-year increase in vehicle deliveries. After crushing Q1 estimates, management’s 2021 outlook is starting to look very achievable. That said, it may take another quarter to convince investors that Tesla’s growth rate will accelerate this year.
This quarter, for Tesla to remain on track to deliver on its guidance, the company will have to more than double its second quarter deliveries on a year-over-year basis. This shouldn’t be too difficult. If Tesla simply maintains its Q1 vehicle deliveries (185,000), this would equate to a year-over-year growth rate of 104%. Notably, Tesla paused production of the Model S and X last quarter as the company refreshed these models. With both vehicles having resumed production in Q2, Tesla’s ability to hit this number looks very achievable.
Can Tesla Beat Its Own Record?
With Musk having called for Tesla employees to go “all out” for the company’s end-of-quarter delivery and production push, the bigger question is whether Tesla can beat its own record. No doubt, the company faces some real fundamental headwinds, ranging from supply chain constraints (mostly around semiconductors), production delays and even safety issues. Notably, May deliveries at Li Auto (NYSE:LI) and Nio fell amid the global chip shortage.
This year, Tesla’s vehicle growth is also partially dependent on continued manufacturing expansion at its factories, particularly at the new plant in Texas and also Germany, which has been more challenging to launch. It’s certainly possible that the company could face some unforeseen hiccups here.
For the most part, the recent weakness in Tesla stock is the result of headline risk relating to increasing competition from mainstream automakers, who are also getting much more serious about their EV roadmaps. For instance, Ford (NYSE:F) recently unveiled its electric F-150 Lightning, as it looks to transition its cash cow, the F-Series pick-up, into the EV space. General Motors (NYSE:GM) is also investing aggressively in EVs, with plans to launch 30 new models globally by 2025. Then there are the newcomers, including Rivian Automotive, whose initial public offering (IPO) is expected later this year, and Lucid Motors, which should complete its SPAC IPO in July.
TSLA Stock: Buy Ahead of Q2 Earnings
Tesla’s recent commentary suggests that management is very confident it can achieve its 2021 forecast. Depending on how well Tesla does this quarter, there’s a good chance TSLA stock will re-set much higher.
My take: with competitive threats largely overblown, and the company well-positioned to capture a massive $5 trillion global automotive market, I remain a buyer of Tesla stock ahead of Q2 earnings. The recent pullback in the shares is an attractive entry point.
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On the date of publication, Joanna Makris did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Joanna Makris is a Market Analyst at InvestorPlace.com. A strategic thinker and fundamental public equity investor, Joanna leverages over 20 years of experience on Wall Street covering various segments of the Technology, Media, and Telecom sectors at several global investment banks, including Mizuho Securities and Canaccord Genuity.