Tesla (TSLA -2.44%) stock has seemingly defied gravity this year. Shares are up about 230% year to date, obliterating the S&P 500's 3% decline over the same time frame. Zooming out to the past 12 months, Tesla's gains are even more astounding. Shares are up about 500% over this period.

With such a massive run-up in the electric-car maker's stock price, the company's upcoming earnings report is particularly important. Investors will look to see whether Tesla is living up to investors' sky-high expectations.

The big question on many investors' minds, however, is likely whether or not shares of the automaker are a buy before earnings on July 22. On the flip side, some current Tesla shareholders may be wondering if they should book their profits before the report.

A blue Tesla Model Y

Model Y. Image source: Tesla.

Warning: Volatility ahead

It's impossible to know whether Tesla stock will go up or down immediately after the company's earnings report later this month. In fact, investors would be wise to refrain from even assigning a probability to the direction the stock will trade. Near-term price swings are just simply too uncertain. But there is one thing investors can expect with near certainty from Tesla stock in the coming weeks and months: volatility.

Thanks to the recent sharp rise in Tesla's stock price, the company now trades at a wildly robust valuation. For instance, the automaker now trades at more than 250 times trailing-12-month free cash flow. Even on a price-to-sales basis, Tesla's valuation is staggering. The stock commands a price-to-sales ratio of 9.6.

With so much of the stock's value today based on future growth projections, the stock is prone to large swings. Small changes in investors' perception of the company's growth trajectory can have a dramatic impact on their collective estimate of the stock's present value.

Execution is paramount

Of course, a frothy valuation doesn't mean shareholders should rush to sell their shares. Tesla stock has won over investor confidence for a reason.

The automaker finished 2019 firing on all cylinders, breaking ground and starting production at a new factory in China in the same year. Further, in early 2020, Tesla brought its Model Y to market six months ahead of its initial schedule and the company has already ramped-up production at its main factory in California to pre-lockdown levels. In addition, after reporting better-than-expected second-quarter vehicle deliveries, the automaker may be on track to achieve the ambitious guidance it laid out before it had to temporarily pause production to help curb the spread of COVID-19.

Investors will be looking for more evidence of this accelerated pace of execution when the company reports its second-quarter results. To get a good pulse on Tesla's pace of execution as of late, investors can look for an update on full-year vehicle delivery expectations and progress on building out vehicle production capacity.

Management had previously said it expected to deliver more than 500,000 vehicles this year. But the automaker refrained from reconfirming this outlook when it reported first-quarter results since there was so much uncertainty surrounding lockdowns at the time. Will Tesla reinstate this target, which implies 36% year-over-year growth, when it reports second-quarter results?

Buy, sell, or hold?

While Tesla's comeback from factory shutdowns earlier this year and its successful launch of the Model Y in March position the company for strong growth in the second half of 2020, investors should proceed with caution given the stock's high valuation. But for current shareholders, the stock is likely worth holding onto -- as long as they are prepared to endure significant volatility and hold for the long haul.

The company's recent impressive execution combined with a mostly untapped market of gas vehicles that could lose market share to electric vehicles in the years ahead make shares a "hold" today.