By Jimmy Butts
You’ve no doubt heard of the company that’s bringing electric vehicles to the masses. Founded in 2003 and based in Palo Alto, California, the company was co-founded by entrepreneur Elon Musk — founder of Space-X and co-founder of PayPal, SolarCity and Zip2.
Of course, I’m talking about Tesla Inc (NASDAQ:TSLA).
The company sells solar panels and solar roofs for energy generation, plus batteries for stationary storage for residential and commercial properties — and, of course, Tesla makes electric vehicles. With the Tesla Roadster debuting in 2008, the S in 2012 and the X in 2015, the company is working on the Model 3, a vehicle developed for the masses with a starting price of about $35,000, compared with the base price of $68,000 for the Model S.
Tesla is one of the most controversial stocks in the market. Bring it up and you’ll hear arguments from both sides: there are loyal admirers of Tesla and Musk, and there are those that haven’t yet been sold on either.
Tesla fans argue that it’s the vehicle of the future and you’re paying for earnings that are quite possibly still five-to-10 years out. Many will argue that it’s following in similar footsteps as Amazon, a company that struggled to turn a profit for many years before coming in and completely changing the retail landscape.
And they might have a point. A look at sales over the last five years shows that folks are really interested in what Tesla’s building. The company has grown from just $413 million in sales five years ago to $7 billion in 2016. And estimates have the company broaching $20 billion by 2018… less than 24 months away.
Those are some phenomenal growth rates. It’s easy to see why many investors are excited about the company’s future.
But we’d be foolish to simply judge the company by sales. After all, Tesla hasn’t turned a profit… ever. And that’s the case many folks make when it comes to investing in Tesla. How can you pay so much for a company that hasn’t made a penny yet? For most, the numbers simply don’t add up.
You might be wondering then how Tesla passed my cash flow screen. And that’s a valid question. Despite the company never turning a profit in the last 12-months, the firm’s cash flow sits at $56 million. Not especially impressive for a company with a market cap of $56 billion, but that $56 million dwarfs the loss that the company has endured previously. So it is growing cash flow.
To circle back to the Amazon analogy, it’s easy to make some connections between Amazon and Tesla. Amazon was founded in 1994, long before the internet was in nearly every household. Yet, it started as an online bookstore and didn’t turn its first profit until the end of 2001. Amazon was pioneering e-commerce and retail altogether. Today, the company generates more than $135 billion in sales and over $16 billion in cash flow.
Like Amazon, Tesla is paving its own way only in the solar and electric vehicle market — an industry that’s been running on fossil fuels since the beginning. It would seem it’s time for a shake-up, and that’s exactly what Tesla aims to do. Disrupt the vehicle market the same way Amazon shook up the retail landscape.
And other vehicle manufacturers are starting to join the electrical vehicle movement. The majority of the large manufacturers are coming out with their own electric vehicles to try to stave off the Tesla threat.
Regardless of what your or my personal opinion is on Tesla, my Maximum Profit system has tagged it as a “buy.” My system doesn’t get caught up in the debates surrounding companies. It only wants to help us make money in the stock market.
One thing to remember: With Tesla, it’s all about future expectations and right now those expectations are lofty. A hiccup in the production of its highly anticipated Model 3, or any slowdown in sales growth could lead to a decline in the stock price.