After two weeks of revealing our choices for the top 25 stocks of the year, we've finally made it to our No. 1 pick.
As we did in 2019, we polled a group of expert writers and editors at TheStreet, RealMoney, Action Alerts Plus, Stocks Under $10 and Trifecta Stocks and asked them to nominate candidates for the stock of the year.
After winnowing down that list to the top 25, we asked those writers and editors to rank them from top to bottom, assigning 25 points for a No. 1 ranking, 24 points for a No. 2 ranking, 23 points for a No. 3 ranking, etc. We then totaled the points for each stock to arrive at our final rankings.
With the final tally marked, one company stood well above the rest -- Tesla (TSLA) - Get Report. The volatile stock has captured the attention of the world with a meteoric 731% rise year-to-date compared to a 15% increase for the S&P 500 index. Rewind the clock back another six months to the lows of June 2019 and TSLA stock has increased 19-fold. Forget doubling or tripling, that's a novemdecupling. We checked.
Perhaps, then, it comes as no surprise that 12 of our 16 panelists voted Tesla as the stock of the year. The company, which has become one of the ten most valuable companies in the world after beginning the year outside of the top 100, even had its stock highlighted in Google's global Year in Search 2020 report alongside terms such as "Coronavirus" and "Election results".
It's been a magical year for the stock, no doubt, but is it justified?
Tesla trades at 21x its trailing-twelve-month (TTM) revenue of $28 billion and over 1000x its TTM earnings. Even Tesla's CEO, Elon Musk, has quipped that Tesla's stock price is too high. Its market cap is higher than Volkswagen, Toyota, Daimler, BMW, GM, and Ford combined. In total, those companies sold 40 million cars in 2019. Tesla sold 367,000 cars last year.
But the stock market doesn't care about last year. It cares about next year (when it can see past the current quarter, at least). Therefore, it cares about growth, and by that metric, the best comparison for Tesla in 2020 might be to a high school LeBron James. Tesla is dunking on everyone.
Since it first crossed $1 billion in revenue in 2013, Tesla has grown revenue at a staggering 52% compound annual growth rate. For context, at that stage in Amazon's growth (2000-2009), its compound annual growth rate was 32%. That means Tesla grew as much in six years as Amazon did in ten. One thing Tesla made clear in 2020: it has no intention of slowing down.
In January, Tesla delivered the first Model 3 vehicles produced at their wholly-owned factory in China, dubbed Giga Shanghai, exactly one year after breaking ground on construction. Not only is a wholly-owned automotive factory in China unprecedented (a joint-venture is usually required), so is the pace at which production has ramped. Tesla reportedly produced nearly 23,000 Model 3 vehicles in China in October, and Giga Shanghai appears to be on track to produce about 150,000 vehicles in its first year.
Taken alone, this would present incredible growth, but Tesla is not stopping there. In 2020 the company announced locations for two new Gigafactories: Berlin and Austin, Texas. In May, Tesla broke ground on Giga Berlin. In August, Tesla broke ground on Giga Texas. Tesla's rapid progress with Giga Shanghai in 2020 gave investors a benchmark for Tesla's newest factories, and both are expected to begin producing vehicles in 2021. So far, Giga Berlin seems to be progressing even more rapidly than Giga Shanghai did.
Now, growth is great, but Tesla's critics have been quick to point to Tesla's lack of profitability in the past. A business can only rely on capital markets to fund growth for so long, and economic downturns can be precarious for such businesses. Tesla answered the bell on both concerns in a big way in 2020.
In July, coming off a seven-week, coronavirus-related production shutdown in Fremont, Tesla posted its fourth consecutive quarterly profit in the midst of ramping up both the brand-new Model Y and the Shanghai-made Model 3. While other automakers struggled with demand in a quarter where the U.S. automotive market declined 33% year-over-year, Tesla's deliveries were down just 5%, constrained by production (Tesla ended Q2 with only 17 days of inventory compared to the industry average of 70).
The underlying strength of Tesla's business was beginning to become apparent. With their factories up and running throughout Q3, Tesla was finally able to capitalize on their investments in Model Y and Giga Shanghai, producing 145,000 vehicles, a staggering 38% increase over their previous all-time high and a 76% increase sequentially. GAAP profitability continued, and Tesla posted a record 9.3% operating margin in Q3. Tesla wrapped up Q3 with a 5-for-1 stock split, signaling management's confidence that Tesla's shiny new market cap was not just a blip.
Seemingly convinced that Tesla's profitability wasn't going away, S&P Global announced in November that Tesla would be added to the S&P 500 index at the start of trading on Dec. 21 despite the company first becoming eligible in July. In the month from the S&P announcement to the close of trading on Dec. 18 (the price at which TSLA is added to the index), TSLA stock gained 70% and closed at an all-time high of $695 a share.
So what's next for Tesla and Elon Musk? In September, Tesla held its highly-anticipated "Battery Day," announcing their foray into manufacturing their own battery cells. Never lacking in ambition, Tesla hopes to scale internal annual battery production to 100 gigawatt-hours (GWh) per year in 2022 and 3 terawatt-hours (TWh) per year by 2030. The former would be enough batteries to produce 1.2 million 300+ mile range Model 3/Y vehicles, while the latter would be enough for 20 million vehicles, plenty of stationary energy storage like Megapack and something in the ballpark of $1 trillion in revenue.
Without internal cell production, Tesla would be at the mercy of battery suppliers to scale as quickly as Tesla aspires to. Speed is critical, but Tesla also announced a set of innovations in battery technology that they believe result in a step-change in vehicle range while reducing battery costs by 56%. The path to a $25,000 Tesla has been established, and Tesla expects to begin offering such a vehicle within three years.
Perhaps the only thing more exciting to investors than Tesla's Hulk-sized appetite for scale is the company's ability to leverage technology and capture software margins through the sale of its $10,000 advanced driver-assist package, controversially named "Full Self-Driving." While the package in its current state is certainly not fully autonomous, it does offer significantly increased functionality and Tesla believes they have the hardware in place on every car they are selling to eventually achieve full autonomy.
While autonomous driving timelines have been particularly tricky for Musk to nail down, Tesla appears to be on the verge of taking a major step forward after a fundamental architectural rewrite of their FSD software. An extremely limited public release of the rewrite has shown impressive progress with owners sharing videos of their vehicles handling roundabouts, taking unprotected left-hand turns and navigating narrow unmarked side streets without human intervention.
As Tesla delivers these features to a broader customer base, they expect to recognize nearly $1 billion in deferred high margin revenue over the next 12 months. Critics of Tesla's profitability point to revenue Tesla earns by selling regulatory credits to other automakers that are unable to meet various government emissions requirements ($1.3 billion trailing twelve months), but few mention Tesla's deferred revenue -- a similar amount which is not reflected in Tesla's profit.
The possible future recognition of this revenue would not only be a one-time benefit, but it would also mean more of Tesla's incoming revenue, and profit would be immediately reflected going forward. Investors expect improving autonomous capabilities to compound Tesla's rapidly strengthening operating leverage, helping justify Tesla's premium valuation over automakers which are increasingly looking less like peers. If Tesla achieves full autonomy? Well, that could make a $650 billion valuation look a bit foolish in the other direction.
Much of the story is yet to be written, but 2020 marked the start of a new chapter for Tesla. Bull or bear, we can all look forward to watching one of the world's most intriguing companies attempt to pull the transportation and energy industries into a new era over the next decade.
Disclosure: Rob Maurer is long TSLA stock and derivatives.