The Tesla (NASDAQ: TSLA) share price surged overnight, taking the company’s valuation above $1trn for the first time in history.
Following this performance, the company is now a member of the exclusive $1trn market capitalisation club. The club has less than 10 members.
Tesla share price performance
The stock jumped after the company received an order from vehicle rental business Hertz. After collapsing last year, Hertz is now emerging from bankruptcy, and it is planning to refresh its vehicle fleet with Teslas. It has placed an order for 100,000 vehicles. Tesla delivered 241,000 vehicles in the third quarter of 2021, so there is no denying this is a significant order for the group.
Overall, the order could be worth $4.2bn for it, but yesterday’s market action added more than $80bn to Tesla’s market value.
This seems to suggest the market has got ahead of itself as has often been the case with this company. Even Tesla’s founder, Elon Musk, is speculating investors might be paying too much for the business.
He tweeted on Monday afternoon that the market’s reaction to the announcement was “strange“. He went on to add that the company has “a production ramp problem, not a demand problem“. To put it another way, the corporation is not having any issue finding buyers for its cars, but it is struggling to meet this demand.
For a long time, I have believed in the Tesla story. However, the company’s valuation has always dissuaded me from investing. But now, after reporting positive net income for nine quarters in a row and demand surging, I am starting to believe the stock could be worth its lofty valuation.
Supply issues
As Musk noted on Twitter, Tesla’s current problem is meeting demand from customers. Over the next few years, the company is ramping up production, which should help overcome this issue. The CEO estimates production can increase by 50% a year for the foreseeable future as production in China expands, and its German factory comes on-line.
The group targets the production of 20m cars a year by 2030, double the output of other large automakers. At the same time, the organisation is rolling out its intelligent driving software, which is sold on a subscription basis and is vastly more profitable than vehicle manufacture.
This seems to be one of the reasons why investors have awarded the group such a high multiple. Selling software on a subscription basis is an incredibly attractive revenue stream. As the number of Tesla cars on the road expands, this could become a significant income generator for the firm.
Risks ahead
Having said all of the above, Tesla is facing similar problems to the rest of the automotive industry. It is having issues scaling up production, and the chip shortage is weighing on growth. Elsewhere, the company has been criticised for its poor aftermarket service. It has also been attacked for misleading consumers over the abilities of its autopilot software.
Despite these issues, I think Tesla’s growth plans are incredibly exciting. It is also clear to me that consumers cannot get enough of the company’s vehicles. This is a problem most companies would love to have.
As demand continues to grow, I do not think it is too late to buy Tesla shares. I would be happy to buy the stock for my portfolio today.
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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Tesla and Twitter. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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