By Gaurav S. Iyer, IFC Published : January 10, 2017
Should You Buy Tesla Stock (TSLA)?
After a roller coaster of a year in 2016, Tesla Motors Inc (NASDAQ:TSLA) entered 2017 with both feet firmly on the ground. In fact, the share price of Tesla stock (TSLA stock) reached a three-month high during the first week of January.
I expect this momentum to carry through the rest of 2017, partially because of how mispriced TSLA stock was during all of last year.
Investors had driven the Tesla stock price down to $143.00 in February 2016. Their sudden pessimism came out of the blue, but the share price has since recovered to enormous success.
We can see acceleration clearly through the last six months of 2016. Here’s how: start with a six-month window on TSLA stock. Check how much Tesla stock has grown in the interim. Then narrow the timeframe to three months, then one month. At each stage, record the returns.
What you’ll notice is that Tesla stock’s returns grow bigger as the year comes to a close. This is what I mean by “acceleration.”
For instance, anyone who invested in Tesla stock three months ago would have gained 12%. If you squeeze that window down to 30 days, the gains jump to 20%.
By my analysis, this phenomenon is poised to continue through the remainder of 2017, meaning the TSLA stock price could rack up triple-digit gains by the end of the year.
Chart courtesy of StockCharts.com
Tesla Stock: A Year in Review
But let’s backtrack for a second. In order to understand the true potential of TSLA stock, we need to “check under the hood” to see if the underlying company is really that good. After all, Tesla stock in 2017 looks like a completely different ball game from Tesla stock in 2016.
Why, you ask? Perhaps it’s because the deal to acquire SolarCity Corp (NASDAQ:SCTY) is signed, sealed, and delivered. Or perhaps it’s because Tesla is starting production on the “Model 3,” its first-ever mass-market car. Oh, and don’t forget that the “Gigafactory” is now churning out batteries at scale.
Battery Cell Production Begins at the Gigafactory https://t.co/xrFl4tChBx
— Tesla (@TeslaMotors) January 4, 2017
These are all huge milestones for Tesla. Elon Musk has been signalling the importance of these shifts for a long time, but investors were over-awed by his ambitions. They fled TSLA stock in a panic at several points during 2016, which turned out to be a horrible mistake since the share price is poised for massive growth in 2017.
But investors weren’t just acting on their own accord. Their fears were stoked by analysts who moonlight as Tesla stock bears; analysts who scoffed at the offer to buy SolarCity, saying shareholders would never approve. Those premonitions caused quite a bit of panic, dear reader. In fact, TSLA stock lost more than 10% of its market value because of that pessimism.
But those analysts were wrong. Shareholders rubber-stamped the deal after hearing the pros and cons. Were these analysts held to account for getting it so wrong? Absolutely not.
The very same analysts thought Tesla would fall short of its production estimates in the fourth quarter. You can understand their thinking; Tesla is famous for missing deadlines. It fell short of estimates earlier in the year, so naturally investors should expect a repeat performance, right?
Unfortunately for the skeptics, past performance doesn’t always predict future performance. Like Michael Jordan with three seconds left on the shot clock, Tesla scored when it counted the most. The carmaker edged past its production targets in the fourth quarter, and turned a profit to boot.
You may have seen some headlines to the contrary, but let’s clear that up. The company did miss its delivery target for the year, due to factors outside its control, but Tesla proved that it could manufacture en masse. At the time that Tesla stock really needed a win, the company delivered.
“We were ultimately able to recover and hit our production goal, but the delay in production resulted in challenges that impacted quarterly deliveries, including, among other things, cars missing shipping cutoffs for Europe and Asia,” said the company in a written a statement. (Source: “Tesla Q4 2016 Production and Deliveries,” Tesla Motors Inc, January 3, 2017.)
It continued, “In total, about 2,750 vehicles missed being counted as deliveries in Q4 either due to last-minute delays in transport or because the customer was unable to physically take delivery.”
A Closer Look at the TSLA Stock Forecast 2017
Now that those nuances are settled, let’s get back to the question at hand. Could Tesla stock continue to surge in 2017? Short answer: Yes. Long answer: Of course.
Jokes aside, I believe the potential for TSLA stock in 2017 is significantly higher than analysts are willing to admit. Once Tesla trims the fat on SolarCity (seriously, their cost of customer acquisition is horrific) there is potential for Tesla to become an end-to-end energy company.
The groundwork for such a shift was laid more than a decade ago.
“Tesla Motors will be co-marketing sustainable energy products from other companies along with the car,” wrote Elon Musk in 2006. “For example, among other choices, we will be offering a modestly sized and priced solar panel from SolarCity, a photovoltaics company.” (Source: “The Secret Tesla Motors Master Plan (just between you and me),” Tesla Motors Inc, August 2, 2006.)
During the decade that followed, it became obvious that Tesla and SolarCity would be better off under the same roof. Both companies shared the “overarching goal of sustainable energy,” not to mention a common customer base. More to the point, Tesla had built a monster-sized battery factory in the Nevada desert. Why build batteries unless you have solar panels to charge them?
If analysts had asked themselves that question when the Gigafactory was first announced, maybe they wouldn’t have been so surprised at the SolarCity purchase offer. I certainly wasn’t. As a matter of fact, I predicted the merger seven months in advance. The writing was on the wall, in bold no less.
On why he decided to merge his two public companies, Elon Musk wrote, “That they are separate at all, despite similar origins and pursuit of the same overarching goal of sustainable energy, is largely an accident of history. Now that Tesla is ready to scale Powerwall and SolarCity is ready to provide highly differentiated solar, the time has come to bring them together.” (Source: “Master Plan, Part Deux,” Tesla Motors Inc, July 20, 2016.)
It’s elegant phrasing, but there’s also real truth there, and investors should pay attention. This means we cannot price Tesla stock as a carmaker. So when a TSLA stock bear compares the price-to-earnings ratios of Tesla against General Motors Company (NYSE:GM) or Ford Motor Company (NYSE:F), they are only displaying gross ignorance.
It is an apples-to-oranges comparison. The truth is, we have never seen a stock quite like Tesla stock, which makes valuing it all the more difficult. We must try to gaze into the future that Tesla is building, and gauge whether it will be successful.
Such an exercise requires value judgments to be made, but that doesn’t scare me. There is significant appeal to a “solar-roof-with-battery product” that gives energy independence to the user, so it seems obvious to me that, if Tesla disrupts the energy industry and the car industry, the Tesla stock price could catapult in 2017. It doesn’t take a rocket scientist to figure that out.
Editor’s Note: Hi, Gaurav S. Iyer here. If you enjoyed this article, you can get more of my opinions and commentaries in our popular daily tech letter, Profit Confidential. Published daily, it’s FREE! Join us when you click here now.