Tesla's (NASDAQ:TSLA) stock is up an incredible 695% in 2020, making it one of the most valuable companies in the world with a $630 billion valuation. Investors have bought in to Elon Musk's product lineup, growth narrative, self-driving technology, and manufacturing expansion plans. Still, there are questions facing the stock going into 2021. 

By any traditional measure, Tesla's valuation seems crazy. The company is valued at 24 times sales and the price-to-earnings ratio is 1,332, despite generating hundreds of millions in regulatory credit sales that aren't core operations. So is the stock going to keep rising, or is the valuation more than investors should bite off right now? 

Tesla Roadster on a highway.

Image source: Tesla.

Tesla's model is working

Elon Musk has always argued that Tesla can generate better margins than traditional automakers by cutting dealers out of the equation and having lower production costs through simple electric vehicle designs. So far, that model is proving correct. 

Tesla's revenue has jumped over the past five years, and it's generating gross margin over 20% on a regular basis, which is near the top of the auto industry. 

TSLA Revenue (TTM) Chart

TSLA Revenue (TTM) data by YCharts

What's even more impressive is that Tesla has maintained strong margins as it has reduced its average selling price of vehicles. The company clearly has a cost structure that competitors haven't caught up to, and with upsells like self-driving now on the market, there could be opportunities to push margins even higher. 

Is Tesla building too big, too fast? 

Tesla's production is expected to reach around 500,000 units in 2020 and could rise rapidly over the next few years. Giga Shanghai is already up and running, and Giga Berlin is expected to start production in mid-2021, bringing Tesla's production capacity over 1 million vehicles per year. 

At the same time Tesla is expanding, competitors are building their own EV capacity. Nio (NYSE:NIO) is expecting to increase its own production capacity from about 60,000 vehicles per year today to 150,000 by the end of 2021. Volkswagen has the capacity to build 300,000 electric vehicles at its new China factory and says it will be able to build 1.5 million EVs annually by 2023. General Motors (NYSE:GM) hasn't set near-term production targets, but it plans to invest $27 billion in EVs and autonomous driving between now and 2025. That's on top of what Nissan, BYD, Hyundai, Rivian, Fisker, BMW and many others have been investing in electric vehicles that have yet to hit the market. As they do, Tesla will face competition like it hasn't seen before, which could affect both volume and pricing. 

Competition could be a problem for Tesla, because it has struggled to make money despite selling every vehicle it could possibly produce. The auto business has a lot of operating leverage, so any reduction in utilization or reduction in price will have a big impact on the bottom line. Right now, investors expect sales volume to grow rapidly and prices (i.e., margin) to remain high -- so any change in that thesis could crater the stock.

Autonomy is a strength that could become a weakness

Today, Tesla looks like a leader in autonomous driving. It's charging an extra $10,000 per vehicle for its "self-driving" Autopilot software, which actually has limited self-driving capabilities. Investors who think Tesla will be able to generate software-like margin from products like this may think the price could go higher. But there's reason to think Tesla is grabbing easy cash from early adopters, while overlooking the true disruption in autonomous driving. 

The most advanced autonomous driving technology is being built by companies like GM-owned Cruise and Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) Waymo, which have already put millions of miles on the road in fully autonomous mode. And they're creating business models that will enable low-cost autonomous ride-sharing in cities around the world. 

As Tesla builds capacity, Cruise and Waymo are building business models that upend the idea of vehicle ownership altogether. No matter how you look at it, autonomous driving is coming, but that may not be good news for Tesla if its software-as-a-service business model is overrun by autonomous ride-sharing that offers a much lower up-front-cost "transportation as a service" business model. 

Is Tesla's stock a buy today? 

I can't get behind Tesla at this price. The company's growth is impressive, and it has proved that electric vehicles can be a viable product long-term. But without regulatory credits, the company still isn't profitable. 

Meanwhile, over a dozen competitors are building compelling EV offerings that will be coming to market over the next few years. This competition will be more compelling than anything Tesla has faced in the past, and may mean not only less demand for Tesla's cars, but also fewer regulatory credits needed by competitors. 

Given all of the pressure coming Tesla's way, I don't think next year will be a good one for the stock. It's definitely not an auto stock I would be buying after 2020's incredible run.