No one would have guessed the rally that Tesla (NASDAQ:TSLA) stock would see in 2020. Year to date, shares are up more than 700%. After such an incredible rise, should shareholders who have enjoyed this spectacular run think about taking profits?

Here's a closer look at what's driving Tesla stock higher, as well as some ideas about what shareholders could do with their big gains this year.

A Tesla Model Y

The Tesla Model Y. Image source: Tesla.

A transformative year

Watching Tesla stock go from about a $70 billion market capitalization one year ago to more than $640 billion today, it's likely tempting for investors to quickly conclude that shares must be extraordinarily overvalued, with a massive crash in the stock's value imminent. But some perspective is in order.

One year ago, Tesla had achieved profitability, but it hadn't demonstrated it could do so consistently. This was concerning. In a capital-intensive industry like auto manufacturing, profitability is paramount. Without the economies of scale to consistently generate positive cash flow, a company like Tesla was one or two unexpected crises away from a domino effect of negative cash flow and swelling debt that could ultimately lead to bankruptcy.

But Tesla turned a corner. More specifically, it hit an inflection point in which it achieved the scale and developed the manufacturing prowess to start turning a profit.

Consider how Tesla's free cash flow and net income have improved over the past 12 months. The company has gone from annualized free cash flow and net income of negative $4 billion and negative $2 billion, respectively, one year ago to trailing-12-month (TTM) free cash flow of $2 billion and TTM net income of $556 million. 

Though this financial progress alone was enough to bolster existing shareholders' and the broader market's confidence in the automaker, it still understates the bigger-picture progress Tesla has seen. Consider Tesla's sales in 2017 versus analysts' average forecast for the metric in 2020 and 2021.

Metric

2017

2020 Estimate

2021 Estimate

Revenue

$8.5 billion

$30.9 billion

$45.5 billion

 Data source: Tesla quarterly shareholder letters 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 may increase its annualized sales by an incredible $37 billion.

On top of all this, Tesla is arguably a market leader (as measured by revenue) in fully electric vehicles and vehicle software, two nascent and rapidly growing markets. It's easy to see why the market is now valuing Tesla like one of the most important companies in the world.

Don't get too excited

Despite the wild underlying momentum in Tesla's business, investors shouldn't get too caught up in this excitement. While the automaker's growth story is worth paying a premium for, the growth stock's recent move higher is bordering on irrational euphoria.

Tesla shareholders may want to take a balanced approach with their shares. It's generally not advisable to sell shares of a company operating at its peak. Tesla is not only executing well, but it's also arguably consistently exceeding expectations. The company is expanding with new factories globally, its vehicle sales are soaring, its battery storage business is growing quickly, and its vehicle software and driver-assistance technology are constantly improving. Yet investors should also realize that Tesla's stock price has reached levels that are becoming increasingly difficult to justify.

While each investor should make his or her own decision, one suggestion is to take some profit, but not sell the entire position. Investors could even take a more systematic approach by creating a schedule to sell some shares -- a move that could eliminate attempts to time the market from their decision.

But for those investors willing to endure what will likely be significant volatility, it could make sense to hold on to some shares. It's always possible that Tesla could continue exceeding expectations. For these brave investors -- those who truly believe in Tesla, its mission, and its market potential -- keeping some shares to hold for the next five-plus years might make sense.

Don't expect more of the same strong momentum from Tesla stock that it has delivered to investors this year, though. We also can't rule out the possibility of a huge sell-off. At the stock's current valuation, investors have priced in outstanding execution from Tesla for years to come, ultimately dampening the outlook for the electric-car maker's shareholders.

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.