Shares of Tesla (NASDAQ:TSLA) have surged since S&P Global announced last month that it would include shares of the electric-car maker in its closely watched S&P 500 index. Given Tesla's $550 billion market capitalization today, the market-cap-weighted index will need to make a major purchase of the company's shares. In addition, many funds that mimic the S&P 500 will likely similarly purchase shares. Investors seem to be betting that this enhanced appreciation for Tesla stock among funds will drive the price higher.

Tesla stock's wild run this year has attracted the attention of many new investors. Shares of the growth stock are up nearly 800% over the past 12 months and 600% year to date. The run-up has made Tesla's market value greater than the next five largest automakers combined. 

With so much excitement on the Street for the electric-car maker, is it time to buy Tesla stock? Or has the stock's recent gain made shares overvalued?

Tesla Model X in a garage with its falcon wing doors open

Tesla Model X. Image source: Tesla.

Impressive execution

For many companies, 2020 has been a somber year. Not so for Tesla. Quite the opposite, actually.

Sure, deliveries fell 5% year over year in Q2 when the electric-car maker's factory in California was shut down for about half the quarter due to pandemic-related government restrictions. But the automaker bounced back quickly, posting 44% year-over-year growth in vehicle deliveries in Q3. This strong quarterly performance put trailing-12-month deliveries up 24%.

In addition, Tesla has drastically expanded its production capacity recently. The company's annualized global production capacity has expanded from 440,000 units about a year ago to 840,000 units at the end of Q3 2020.

This production capacity expansion, of course, will support growing Model 3 sales and expanded production of Tesla's new Model Y, which was introduced to Tesla's vehicle lineup earlier this year.

The company's most notable recent achievement is swinging from negative cash flow in the first half of 2019 to significant positive cash flow recently. In the third quarter of 2020 alone, Tesla generated $1.4 billion of free cash flow.

What Tesla must do next

Of course, the market has already recognized Tesla's extraordinary momentum, driving up the stock price. This is where the major concern for investors comes in. The electric-car maker is now one of the most valuable companies in the world. Going forward, Tesla will need to demonstrate near-flawless execution on its expansion plans in order for the stock to continue rising.

In addition to continuing to grow vehicle sales rapidly, Tesla will have to build out its nascent battery storage and solar business while also making significant progress in software.

Over the long haul, Tesla believes its vehicles will be able to drive themselves. The company plans to fine-tune its software and beam over-the-air updates to its vehicles, enabling self-driving features. If the automaker can pull this off, Tesla could undoubtedly charge extremely high prices for the software. Indeed, Tesla has already been rapidly increasing the prices of its "Full Self-Driving" software package, which lets customers access enhanced driver-assist features and prepay for a potential launch of fully autonomous driving capabilities. The option currently costs $10,000, up from $5,000 as recently as May of last year. 

Since there's no guarantee Tesla will be able to roll out updates to make its vehicles fully autonomous, investors should be cautious about buying shares at this valuation. Of course, it's always possible that Tesla will deliver on its autonomous driving aspirations, building one of the world's most valuable software businesses while it's at it. Still, investors may want to look for a better entry price to leave some room for error when it comes to rosy projections for the automaker.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.