With Tesla (NASDAQ: TSLA) stocks hitting new highs during the week (crossing $ 500 at some point) on news that the automaker will soon be included in S&P 500 Index, many investors are likely to take a closer look at the stock. Some investors who have missed its meteoric rise over the past 12 months are likely to wonder if it’s too late to buy into this growth story. In addition, shareholders may consider taking some profits.
While there is never a way to be sure how a stock will perform in the long run, investors should at least do their best to understand whether the current valuation seems to make sense or not. To help investors with their thinking, here is a closer look at the company̵
2020: A year of expansion
A brief review of Tesla’s momentum in 2020 explains why investors have piled into the stock. Subsequent 12-month deliveries have increased 24% year over year, despite the company suffering from factory shutdowns earlier in the year due to COVID-19-related lockdowns.
Recently, however, growth has accelerated. Deliveries in the third quarter increased 54% year-over-year, primarily driven by an increase in production of the company’s March-launched Model Y.
Tesla has expanded aggressively this year, including bringing its Model Y to market earlier than expected and building new production lines at new factories.
The automaker left 2019 with the installed production capacity to produce 640,000 vehicles annually. Since then, Tesla has not only installed tools for an additional 200,000 vehicles annually, but has also begun constructing brand new production lines at its new factories in Shanghai, Berlin and Texas.
With such incredible momentum and the foundation laid for sharper growth in the future, it is not surprising that consensus analysts estimate that Tesla’s revenue will jump 46% next year.
Meanwhile, 2020 was also the year Tesla swung from losing money to generating significant profits. The car manufacturer generated 1.4 billion. Dollars in free cash flow only in the third quarter of 2020.
Priced for perfection?
While Tesla’s growth story is certainly impressive, shares of $ 500 are no doubt already priced in much of the company’s exciting prospects. For example, even if Tesla were to increase its revenue at an average rate of 30% annually over the next five years and achieve a net profit margin of 7% on that revenue, it would generate $ 7 billion in net revenue annually. This is a rather small amount, even compared to the automaker’s nearly $ 500 billion market value today.
But there are two factors that make the Tesla stock a potential buy – even at today’s expensive levels. First of all, if there is a turning point in the future where fully electric cars become a common replacement for internal combustion engines, Tesla is undoubtedly at the top of the iceberg in a massively addressable market – and sales growth could not only exceed 30% annually, but high growth rates can also be maintained for over a decade.
Second, if Tesla eventually releases software updates that make the vehicle fleet fully autonomous – something management believes the company will be capable of – then the company could build one of the most valuable software companies in the world.
CEO Elon Musk in particular has said he believes the value of its autonomous software could exceed $ 100,000 per share. Vehicle. While customers are unlikely to be willing to drop $ 100,000 on vehicle software, the company could switch to a subscription model and build a massive recurring revenue stream with a high margin. This could not only accelerate Tesla’s revenue growth, but also provide the company with profit margins in line with mature technology companies.
Buy, sell or hold back?
In short, Tesla shares can prove to be rewarding even from these levels – although completion and the continued market share required by Tesla are far from guaranteed. For this reason, I would like a better entry point into the Tesla stock – perhaps somewhere under $ 450. On the other hand, the potential upside of software selling stocks is a mistake.
So are Tesla shares a buy, sell or hold? For those willing to endure volatility and embrace the risk of a stock priced to near perfection, the stock looks like a $ 500 team. But more risk-averse investors might want to stay away and hope for a better price, before they buy.