Tesla (NASDAQ: TSLA) shares are on fire right now. The stock has soared over 600% in 2020 and UK investors can’t get enough. It’s the eighth most purchased shares on the Hargreaves Lansdown investment platform. Pardon the pun, but Tesla’s share price performance has been electric.
Bearing this in mind, is this stock rally likely to continue? Let’s take a closer look at the investment case.
Strong results
Revenue from Tesla’s automotive division has been growing quarter-on-quarter, which has helped the share price. Most of the company’s sales come from its electric vehicles, but Tesla also has a growing energy generation and storage segment.
Things look promising for the energy business as demand for its solar products remains strong. Tesla shares have rallied as investors are banking on the hope that it can grow this alternative division and diversify its revenue.
Inclusion in S&P 500
Recently, Tesla shares have soared on the news of it entering the S&P 500. The inclusion of the company means that all the passive funds that track the index will need to buy the shares in substantial quantities. I believe this bulk buying means that Tesla shares are likely to continue to rise in the short term.
The heavy buying from the index-tracking funds is expected to be temporary. I believe traders are using this opportunity to buy and sell Tesla shares around the inclusion date on 21 December. I’m a long-term investor and so will focus on the company’s performance, rather than its index inclusion.
Market reaction
The surge in Tesla shares has been met with mixed views. Goldman Sachs has just upgraded the stock from a hold to a buy with a price target of $780. Tesla shares are currently trading at $643, which means that investors could get a further 20% gain.
According to marketscreener.com, 11 out of 37 analysts rate Tesla as a hold, with 9 rating it as a buy. From this I deduce that the consensus view is to wait and see as investors are unsure whether to dip their toe in.
Not everyone is positive. Hedge fund manager, Michael Burry is bearish on Tesla shares. He featured in the 2015 Hollywood hit The Big Short after predicting the 2008/09 housing market crash. Burry is pessimistic on Tesla’s outlook and has even advised the founder, Elon Musk to take advantage of the sky high stock price to raise more cash.
Be cautious
Elon Musk himself has warned Tesla’s employees that the share price could get “crushed like a soufflé under a sledgehammer”.
He highlighted in a recent leaked internal email that the company’s actual profitability is very low. Investors are placing emphasis on future profits, which if not met will result in the price tanking.
Stock price
There’s no denying that Tesla shares have performed well in 2020 but I can’t justify buying the stock for my portfolio at current levels.
Rather than the direct stock, I would prefer to buy Scottish Mortgage Investment Trust, which has an impressive track record. It’s a global portfolio of private and public companies and includes Tesla, should I want some exposure to the company.