Tesla is one of the stock market’s most divisive stocks, with passionate investors on both sides of the debate. Some things aren’t up for debate, however. Elon Musk, Tesla’s outspoken CEO and founder, has managed to turn what once seemed like a pipe dream into the world’s dominant electric-vehicle company.
Tesla stock (ticker: TSLA) has also been a big gainer. Even after falling more than 20% from its January 52-week high, Tesla’s stock price has gained more than 400% over the past 12 months. The huge run has made Tesla, never the cheapest of stocks, look even more expensive. How much is Tesla stock? It’s the third priciest stock in the S&P 500 based on 12-month earnings projections.
Tesla has big plans, including solar panels, home battery storage, and charging networks, but is also facing new competition that is narrowing the gap on electric vehicles. Here’s what you need to know before buying Tesla stock.
By the Numbers
Data as of April 20
Source: Bloomberg
The case against buying Tesla stock: Tesla makes cars. They’re good cars–exciting cars even–but still cars. Tesla sold about 500,000 cars in 2020, which is a fraction of the number sold by Ford Motor (F), General Motors (GM), and other auto manufacturers. But Tesla’s market cap is larger than Ford, GM, Toyota (TM) and Volkswagen (VOW3.Germany) combined. Tesla isn’t valued like other car companies; it’s valued like a high-growth technology stock.
Tesla shares trade for roughly 85 times estimated 2023 earnings. Amazon.com (AMZN), another highly valued growth stock, has traded for about 40 to 50 times estimated earnings a couple of years out.
For Tesla to warrant that valuation, it will need to sell more cars, introduce new models, and maintain the sky-high profit margins it earns from being the first mover in electric vehicles. That’s what worries J.P. Morgan analyst Ryan Brinkman, who rates Tesla stock a Sell with a $155 price target. Tesla will have to execute flawlessly as the company ramps up new models and new production. Any slippage in new model timelines, production, or profit margins arising from higher-than-expected start-up costs might disappoint investors. For Brinkman, the risks of any stumbles aren’t adequately reflected in the current share price.
Others worry about Tesla’s ability to continue selling what’s known as Zero Emission Vehicle credits. Tesla earns those credits by selling electric vehicles. It then sells those credits to car companies that make traditional gas-powered cars and need to offset their carbon. Selling those credits has made Tesla $2 billion from 2011 to 2020. Roth Capital analyst Craig Irwin worries that the value of credits will decline as other auto makers start selling move EVs. He rates Tesla a Hold and predicts the stock can hit $150.
Brikman and Irwin have two of the lowest price targets for Tesla stock. At their price targets, Tesla would still be worth almost as much as Toyota (TM).
The case for buying Tesla stock: Yes, Tesla stock is pricey, and buying it means that you believe the company can be worth much more than a car manufacturer. That’s not unheard: Apple was once an overpriced computer manufacturer until it decided to do more than build computers. And many of the most optimistic investors see Tesla become something very similar to, well, Apple.
Just as Apple sells hardware like phones, computers, and watches and then offers services inside its ecosystem, Cannacord analyst Jonathan Dorsheimer believes Tesla can sell cars, solar panels, and batteries, and then sell services and software to its customers. Dorsheimer rates Tesla stock Buy with a $1,071 price target, one of the highest price targets on the Street.
And Tesla has plenty of services to offer. The company sells residential solar panels, battery backup power, electricity as part of its charging network, as well as self-driving software. ARK Invest’s Cathie Wood believes full self-driving technology will help Tesla launch its robotaxi business in the coming years.
Key Events for Investors to Watch
Tesla
- April 26: First-quarter earnings
- Second quarter: Model S Plaid ships
- Second quarter: Full self-driving beta rolls out
- Fourth quarter: Berlin plant opens
Of course, Tesla will always make cars. Because it only makes EVs, it costs the company less to make an electric car than other auto makers, which means more profit per car. Tesla started out selling higher-end cars such as the Model S, Roadster, and Model X SUV. In recent years, Tesla introduced a lower-priced Model 3 sedan and Model Y crossover vehicle. Tesla’s lineup today is comparable to, say, BMW (BMW.Germany). In the future, Tesla plans to offer lower-priced sedans and a light-duty truck dubbed Cybertruck.
Tesla is building capacity to meet its expanding addressable market. New Street Research analyst Pierre Ferragu projects 2 million deliveries by 2023 with sales over $90 billion, up from the 500,000 cars delivered in 2020 and sales of $31.5 billion.
Dorsheimer and Ferragu believe these goals are realistic and make the stock worth buying.
Barron’s take on buying Tesla stock: Morgan Stanley analyst Adam Jonas recently warned his clients that auto investors “face a greater risk of not owning Tesla shares in their portfolio than owning Tesla shares.” And we agree.
Investors, however, never have to take an all-or-nothing approach. A small position in Tesla stock, maybe just 1% of a stock portfolio, seems like a good place to start. Just remember: If you own an index fund, you may already own Tesla. It makes up about 1.6% of the S&P 500 and 1.4% of the Russell 1000.
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Write to Al Root at [email protected]
