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Why did Tesla surpass Toyota as the world’s most valuable automaker?

Tesla’s market cap topped US$207 billion on Wednesday, overtaking Toyota. How much higher can its share price go?

Tesla share price forecast stock chart Elon Musk Source: Bloomberg

Tesla Inc is now the world’s most valuable automobile company by market capitalisation.

On Wednesday 01 July, the electric carmaker overtook Toyota Motor Corp's market value when it rose as much as 6% throughout the session to conclude at an all-time high of US$1,138 a share.

In the process, Tesla achieved its highest market cap ever at US$207.55 billion. At the same time, Toyota was trading at a valuation of US$202.70 billion.

Tesla’s profitability remains a question mark

While Tesla shares have stayed in bullish territory for the better part of this year (share price is up 171% year-to-date), news agencies are often quick to point out the fact that the company has yet to turn in a profitable financial year based on standard accounting measures.

Total production and deliveries – two figures Tesla bulls and investors frequently cite as indicators of the automaker’s potential value – were also down quarter-on-quarter in Q1 2020 by 2% and 21% respectively.

Comparatively, production and deliveries of Model S/X and Model 3/Y - Tesla's two key product lines - had risen against previous quarters throughout 2019.

Why do Tesla shares continue to do so well?

IG market analyst Monte Safieddine says this latest rally is further proof of how Tesla’s stock price ‘defies underlying fundamentals and even future concerns that could dent growth and profitability’, including a resurgence of Covid-19 and geopolitical tensions.

‘Whether one calls it a car company or a tech company; so far when it comes to (Tesla’s) share price, fresh record highs are being posted at a time when transportation is dented, and car companies are hurt,’ he writes.

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The speculative nature of the stock also means that ‘investors hunting for dividends won’t find Tesla an attractive option’.

‘But that also means price gains will be crucial in enticing investors into the volatile market, for any price increase that is clearly unjustified – if not, speculative - will scare away those looking for a healthy balance sheet and potential consistent returns, especially if liquidity woes return to the financial markets,’ says Safieddine.

Optimistic outlook for the rest of 2020

Despite these setbacks – partly caused by production interruptions across the world amid the Covid-19 pandemic, Tesla remained optimistic about its production figures for the rest of the year.

‘Despite the expiration of various government incentives at the end of last year, Q1 was pacing to be the strongest quarter of deliveries until our operations were interrupted in March,’ said the company in its most recent financial update.

In light of those sudden halts, Tesla expects the production of Model Y in Fremont and Model 3 in Shanghai to be ramped up gradually through the second quarter.

Additionally, it is still committed to increasing production capacity for Model Y at Gigafactory Berlin and Gigafactory Shanghai, with deliveries on track to start in 2021.

While no guidance on its earnings was provided, Tesla did say that it has been ‘diligently managing working capital, reducing non-critical spend, and driving productivity improvements’, adding that it is ‘well-positioned to manage near-term uncertainty’ while balancing long-term plans.

Where next for TSLA stocks?

Having examined these factors, can the stock keep rising in the next few months?

In the immediate, Safieddine projects that there will be some more volatility in Tesla’s share price, with its latest production and delivery numbers due for release on Thursday 02 July – an event he is certain will further entice speculators.

Beyond that, Safieddine says that ‘any and all gains are at risk of an eventual reversal’, especially if US-China relations worsen ahead of the US presidential election in November this year.

He added that this will put a part of Tesla’s future growth at risk, with a likely move back below the US$1,000 level.

On the other hand, while there are aspects of Tesla’s business that might benefit from a worsening economic environment, Safieddine states that price predictions will become trickier with an increasing number of unknown factors.

How to trade Tesla shares with IG

Are you feeling bullish or bearish on Tesla Inc and other Nasdaq 100 stocks? Either way you can buy (long) or sell (short) the asset using derivatives like CFDs offered on IG’s industry-leading trading platform in a few easy steps:

  • Create a live or demo IG Trading Account or log in to your existing account
  • Enter <Tesla Motors Inc> or <TSLA> in the search bar and select it
  • Choose your position size
  • Click on ‘buy’ or ‘sell’ in the deal ticket
  • Confirm the trade

The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer.

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