There was a lot of fuss lately when Tesla Inc (NASDAQ:TSLA) dominated the leaderboard as the largest U.S. car company by market value. However, flash forward to April 12 when General Motors Company (GM) reclaimed its throne as the largest U.S. car company with a market cap of $50.9 billion, with Tesla’s market cap slipping to $48.0 billion, and Ford Motor Company’s (F) market cap declining to $44.6 billion.
After the strong rally this year of its stock, 42.1% since the beginning of the year, investors might wonder if now is the right time to start building a position in Tesla’s stock.
One thing is for sure: gambling on Tesla stock is not for the faint-hearted considering the stock has shown strong rallies and big declines alike in the last few years. For example between July 2, 2015 to February 9, 2016, the stock had tumbled 50.1% from $282.45 to $141.05. What’s more, after Tesla’s stock had soared 91% to $269.34 on April 7, 2016, it fell 33.8% to $178.19 on November 4, 2016. Since then, the stock surged 70.4% to $303.70 on April 12.
Also, value investors, who follow the strategy of the legendary investor Warren Buffett and his mentor Benjamin Graham, should not be buyers of Tesla’s stock. Value investors look for low price to earnings, low price to sales ratios and significant dividend yield. Yet, Tesla does not pay a dividend and has suffered a loss in four of its last five quarters, as shown in the table below.
In contrast, growth investors might appreciate the company’s impressive sales growth in the last few years. Tesla’s annual average sales growth over the previous five years was extremely high at 102.8%. Moreover, the market expects the company to achieve revenues of $11.38 billion in 2017, representing 62.6% growth rate year-over-year.
* 2017 estimate
Furthermore, following Tesla’s delivery of 76,000 vehicles in 2016, the electric car giant has indicated that it expects to produce more than 5,000 Model 3 sedans per week by the end of 2017, and provide 47,000 to 50,000 Model X and Model S cars combined in the first half of the current year. That represents a growth of 61% to 71% compared with the first half of 2016, a very impressive rate in my opinion.
Some investors might also like Tesla’s futuristic vision of clean energy electric vehicles and autonomous self-driving cars. However, all the leading car manufacturers are also offering electric vehicles, and companies like Ford Motor have already advanced autonomous vehicles projects. Tesla is unique in the fact that it produces only electric vehicles. In my view, Tesla will have a significant advantage over its competitors in the electric vehicles market due to its Gigafactory outside Reno, Nevada which started mass production of lithium-ion battery cells this year on January 3. Batteries represent the single most costly part of electric cars, and by producing its battery cells, the company could significantly reduce the cost of its car production.
Investors who follow top analysts’ opinions offered by TipRanks might be quite confused. While the best performing analyst average price target is at $291.50 indicating a downside of 1.80% from the close price of $296.84 on April 13, some top analysts are giving much higher target prices, and some are offering considerably lower target prices. Four star analyst Ben Kallo of Baird ten days ago suggested a target price of $368, representing an upside of 24%, while five star analyst Rod Lache from Deutsche Bank 24 days ago listed a target price of $240, 19.2% below Tesla’s stock last price.
Another factor that could concern investors is the fact that Tesla’s stock has by far the highest short interest as a percent of the float, 26.27%, among all 196 companies with a market cap greater than $40 billion trading in U.S. markets. The very high short interest indicates that many people believe that the stock is going to fall sharply. On the other hand, if Tesla will be able to deliver on its promises, a short squeeze could drive the stock meaningfully higher.
All in all, as I see it, the answer to whether Tesla’s stock is a good investment right now or not depends on if the investor believes that the company will be able to fulfill its plan. That is, producing more than 5,000 Model 3 sedans per week by the end of 2017 and deliver 47,000 to 50,000 Model X and Model S cars combined in the first half of the year. As investing in Tesla’s stock is pretty risky, having seen in the last two crashes in the stock price, I would rather wait to see signs of production results before buying the stock.
Since Tesla is a great company with a bright future on the long run, I believe that a significant correction in its stock price might be the best moment to start a long-term investment in the stock. In any case, for peace of mind, I am not recommending shorting the stock.