Catalysts For Tesla In 2021
People predicting lower stock prices during the last day before Tesla (TSLA) was added to the S&P 500 index turned out to be wrong. Apparently, index funds bought many shares at the close, to minimize tracking error. That resulted in a new high of $695. Volume was enormous, which is a bad sign for the stock price going forward. People predicting much lower prices during after-hours trading were wrong as well. However, the same bearish investors were correct with their prediction of a push back on the first trading day after Tesla had been added.
Selling now, at the end of the year, is tax-inefficient for most investors in the US. With this year's market performance not many investors can offset their gains on Tesla with losses on other closed positions. I have no doubt that will be much different next year. Therefore I expect a lot of air will escape from this bubble in 2021.
Comparison with 1999/2000 dotcom bubble
Let's have a look at 1999/2000 again. Most investors from today were not around during that time. I would say the bubble from that time is similar to the current bubble but also different. What was the dotcom sector then is now the EV sector. I think other technology stocks are overvalued as well, such as Apple (AAPL), Amazon (AMZN), and Microsoft (MSFT).
Like 20 years ago there are many IPOs but probably not as many as 20 years ago. But nowadays many companies get a listing through a Special Acquisition Company, or a SPAC. When counting IPOs and SPACs together I think new companies have attracted much more new money than 20 years ago, even when corrected for inflation. See here.
While in 1999/2000 most investors just bought shares many investors are also buying call options today. So they use leveraged instruments. I think this leverage has pushed up valuations more than the simple share buying 20 years ago. The downside of a rally from leveraged instruments is that it makes the downside much larger.
Yes, stocks can go down: in the beginning of 2000, they went down without a real catalyst. Instead it is fair to say extra supply with new listings of dotcoms caused the bubble to burst. It was the same with bitcoin (BTC-USD) at the end of 2017 and in 2018. Clever people had created too many competing cryptocurrencies. With the many new IPOs and SPACs Wall Street has shown again that it is extremely efficient at increasing the supply in bubble times. So no exception for EV stocks like Tesla.
The stock in 2021
Better than expected deliveries over Q4 2020 could push the stock up. Last quarter the company delivered about 139k cars, way below production capacity. This quarter it could be 170k or 180k, which is still way below production capacity. Very many deliveries in China helped Tesla in November. The big question is whether the company can repeat this in December.
For the growth thesis to remain valid producing at maximum production capacity and delivering all these cars should be a slam dunk. Not only that, for the growth thesis to remain valid it should be a slam dunk for Tesla to increase its production capacity, and continue producing and delivering at increased maximum production capacity.
I do not think that is realistic at all because of competition. We have seen competition working already in 2020 in Europe. During this quarter Volkswagen has delivered already more than twice the number of ID.3s than the number of model 3s delivered by Tesla. Not a good story about the supposed world leader in electric cars. I expect that to happen in the US as well in 2021.
I am surprised Tesla has not introduced the model Y in Europe yet. Furthermore, allegedly Tesla did not pay a deposit of $100 million related to the work on the Brandenburg factory in time. That is not only a sign of financial distress but will also cause further construction delay damaging the growth story.
Other negative catalysts are the lawsuits against Tesla. In particular, the lawsuits related to whistle-blower retaliation and the Solar City acquisition. These lawsuits will continue in 2021.
This month Tesla has suspended its production lines for model S and X. Expect that to happen more often in 2021.
In 2021 Toyota will continue to issue press releases about its battery technology. It might even unveil a concept car. When it manages to produce the first mass-production car with a solid state battery investors will realize Tesla is using outdated technology. I do not think that will happen in 2021 but news on this could still depress the stock.
While fundamentally a much less severe threat news releases about an electric car developed by Apple could also depress the stock. See here.
Other issues
See reporting about a recent accident in China. most likely it is caused by sudden unintended acceleration, although Tesla denies it. I expect these accidents to become more common as the Tesla fleet increases, unfortunately. Eventually, this issue will result in a world-wide recall of all Tesla cars.
Allegedly Tesla is sued for not a small electric bill in San Diego. In a couple of days the publisher of the tweet will publish more details.
Bottom line
Strong catalysts are necessary to push the stock further up. I do not think such catalysts will come in 2021. More or less all cards have been played now. Moreover, the market ignores potential negative catalysts. I do not think delivery numbers alone can keep the stock where it is now. Therefore my opinion on the stock is still: strong sell.
Not only Tesla shares are overvalued. Most other Nasdaq stocks are massively overvalued as well. I think things will turn to normal when large scale vaccinations start. That is, with reduced consumer confidence, higher taxes to pay back government debt, and fewer jobs because many business will go bankrupt. For this reason my opinion on index funds like QQQ is also strong sell.
Disclosure: I am/we are short TSLA.