Tesla stock is hitting new highs: time to take profits?

No one would have measured that rally Tesla (NASDAQ: TSLA) stocks would be seen in 2020. Year to date, shares are up more than 700%. After such a dramatic rise, should shareholders who enjoyed this amazing run think about making a profit?

Here ‘s a closer look at what drives Tesla’ s stock higher, as well as some ideas on what shareholders could do with their big gains this year.

Transformational year

Watching Tesla stock go from around a market capitalization of $ 70 billion a year ago to more than $ 640 billion today, it seems disappointing for investors to quickly conclude that shares need to be highly valued, with a major crash in the value of the stock to come. But some perspective is in order.

One year ago, Tesla had made a profit, but had not proven that it could do so consistently. This was a cause for concern. In a capital-intensive industry such as automated manufacturing, profit is of paramount importance. Without the economies of scale to consistently generate positive cash flow, a company like Tesla had one or two unexpected complaints away from the domino effect of negative cash flow and inflated debt that could lead to bankruptcy.

But Tesla turned a corner. In particular, he hit an inclusion point in which he achieved the scale and developed the manufacturing capabilities to start turning a profit.

Consider how Tesla’s free cash flow and net income has improved over the past 12 months. The company has gone from annual free cash flow and negative revenue of $ 4 billion negative and $ 2 billion negative, respectively, a year ago to $ 12 billion free cash flow (TTM) of $ 2 billion and TTM net revenue of $ 556 million.

While this financial progress alone was enough to support existing shareholders and the general market confidence in the automaker, it still confirms the greater progress Tesla has seen. . Consider Tesla’s 2017 sales against analysts ’average forecast for the metrics in 2020 and 2021.

Data source: Tesla and Yahoo! Finance.

Between 2017 and 2020, Tesla is on track to add $ 22.4 billion to its annual revenue. Between the end of 2017 and the end of next year – a period of just four years – the company can increase its annual sales by a staggering $ 37 billion.

In addition to this, Tesla can be said to be a market leader (as measured by revenue) in fully electric vehicles and vehicle software, both nascent and growing markets. soon. It is easy to see why the market now values ​​Tesla as one of the most important companies in the world.

Don’t be too excited

Despite the real wildfire in the Tesla industry, investors shouldn’t get too caught up in this excitement. While the automaker’s growth story is worth paying a base price for, the recent upward movement of the growth stock is approaching a careless euphoria.

Tesla shareholders may want to take a balanced approach with their shares. It would not normally make sense to sell shares of a company operating at the highest level. Not only is Tesla performing well, but it is also capable of exceeding expectations. The company is expanding with new factories around the world, sales of their vehicles are going up dramatically, its battery storage business is growing rapidly, and the vehicle software and driver support technology constantly improving. But investors should also understand that the price of Tesla stock has reached levels that are becoming increasingly difficult to confirm.

While each investor should make his or her own decision, one suggestion is to take some profit, but not sell the whole situation. Investors could take an even more organized approach by creating a record for selling certain shares – a move that could derail efforts to remove the market from their decision.

But for those investors who are willing to suffer a major potential move, it might make sense to hold on to some shares. It is always possible that Tesla could continue to go above and beyond expectations. For those brave investors – those who truly believe in Tesla, its mission, and its market potential – it might make sense to hold some shares for the next five years.

Don’t expect more of the same strong move from Tesla stock it delivered to investors this year, though. We also cannot deny the potential for big sales. At the normal valuation of the stock, investors have put a price to death from Tesla for years to come, ultimately ruining the outlook for electric car shareholders.