Why the Bears Are Wrong About Tesla Stock
Tesla Inc (NASDAQ:TSLA) is a stock that the bears love to hate. However, the company has been a disruptive force and has accomplished many things that people once thought were impossible.
Tesla has set out some very ambitious goals and will likely encounter obstacles on the way to reaching those goals. And every time the company hits an obstacle, it gives TSLA stock bears a reason to cheer.
The bears probably won’t be laughing in the long run, though. While Tesla stock has been on a roller coaster ride in recent years, its long-term price target could be much, much higher than what it’s trading at today.
The main argument for many TSLA stock bears is that it’s too expensive for an automaker stock. For instance, since Ford Motor Company (NYSE:F) and General Motors Company (NYSE:GM) trade at quite low price-to-sales ratios, how can Tesla justify having a higher premium in its valuation?
Well, the answer is that Tesla is not a regular automaker. And to see that, all you need to do is take a look at last year’s scorecard.
Tesla Inc Is Not the Average Automaker
In 2018, General Motors, Ford, and Toyota Motor Corp (NYSE:TM)—the top three best-selling car companies in the U.S. market—all reported lower U.S. vehicle sales than in 2017. (Source: “USA – Flash report, Sales volume, 2018,” MarkLines, January 4, 2019.)
Tesla, on the other hand, delivered a total of 245,240 vehicles in 2018.
To put this in perspective, the company delivered nearly as many vehicles in 2018 as it did in all prior years combined. Compared to other automakers, Tesla’s growth rates were on a completely different level, to say the least. (Source: “Tesla Q4 2018 Vehicle Production & Deliveries, Also Announcing $2,000 Price Reduction in US,” Tesla Inc, January 2, 2019.)
The blunt reality is that the automotive industry is cyclical. Looking at the market as a whole, we see that people tend to buy more new cars when the economy is booming and their incomes are rising, and they buy fewer new cars when a recession arrives.
The stock market takes into account the cyclicality of the auto industry. That’s why, when times are relatively good (like right now), automaker stocks tend to look cheap—their sales and profits are high. During economic downturns, their valuations tend to look more expensive.
But as the numbers above have shown, Tesla’s business doesn’t really move in the same rhythm as the overall auto industry—or at least not yet. The main reason is that the company is still growing and is yet to reach its full potential. That’s why TSLA stock might appear expensive relative to other automakers, but it’s merely a reflection of a stage in the company’s growth path.
Now, you are probably wondering just how much growth potential Tesla Inc really has. To answer that question, we must take into account the upcoming trend in the auto industry: the move toward zero-emissions vehicles (ZEVs).
By definition, a ZEV emits no exhaust from its onboard source of power. Battery-electric vehicles like the ones made by Tesla are good examples of ZEVs.
Based on the sales figures of Tesla’s “Model S,” “Model X,” and “Model 3,” we know that consumers have a special fondness for the company’s products. And the changing regulatory environment could take Tesla’s business to a whole new level.
For instance, the European Union has proposed strict electric vehicle mandates. The plan is that, by 2040, there will be no emissions from new cars being sold. (Source: “Strict electric vehicle targets proposed by EU,” The Irish Times, September 11, 2018.)
In Canada, Federal Minister of Transport Marc Garneau said that the Canadian government has set a target for ZEV sales to account for 10% of all new vehicle sales in the country by 2025. And by 2040, Canada expects to sell 100% ZEVs. (Source: “ZEVs to account for 100% of new cars sold by 2040,” Canadian Automobile Dealers Association, February 19, 2019.)
Tesla Inc Stock Chart
Chart courtesy of StockCharts.com
Put it all together and you’ll see that, rather than being just an automaker, Tesla is a disruptive force in the automotive industry. The company has already established a solid position in the ZEV market and is well positioned to capitalize on regulatory tailwinds.
And don’t forget, other than making cars, the company also makes solar panels and battery packs, and is a leader in autonomous driver-assist technology.
Tesla even has plans for the ride-sharing industry. Last month, CEO Elon Musk said that a fleet of on-demand robot taxis made by Tesla could arrive as soon as next year. (Source: “Tesla’s Elon Musk Promises Robot Taxis by Next Year,” The Wall Street Journal, April 22, 2019.)
Given the growth prospects of the ZEV industry and the size of Tesla’s other potential markets, I believe that, in the long run, the company could justify a market capitalization of over $160.0 billion—nearly four times today’s number.
That is to say, if things work out as planned, a $1,000 price tag on TSLA stock is not impossible.