Tesla Motors Inc (TSLA) is Wall Street’s favorite momentum stock. TSLA stock is up 75% year-to-date, 85% in the past 12 months … and if you think that’s impressive, Tesla stock is up a staggering 780% in the past two years!
But as with any momentum trade, TSLA stock has plenty of detractors who are worried about valuation. After all, a pullback is bound to happen eventually for Tesla stock … so the question isn’t if the crash will come, but merely when.
Well, I won’t moralize over the phenomenon of momentum fad stocks like Tesla. I also won’t pretend to know where TSLA and Elon Musk will be in two or three years.
All I know is that right now, TSLA stock has a brisk tailwind, and swing traders can use that to their benefit.
Here’s why I think Tesla is a buy at current levels — at least for the short term:
TSLA Cash and Assets: One thing that doesn’t get enough attention is that Tesla boasts cash and equivalents of about $2.7 billion as of the end of June and about $5 billion in total assets. Sure, the company is roughly running at breakeven, but it has quite a stable balance sheet.
Tesla Isn’t an “Automaker”: Yes, TSLA stock is valued very highly based on a relatively small number of vehicle sales. But let’s not start throwing around notions of how General Motors (GM) and Ford (F) move literally more than 100 times the total vehicles but are valued at only twice Tesla by market cap. These companies are not true peers, and anyone who looks at the way TSLA manufacturers and sells its cars would know that.
Gigafactory: One prime example of that different mentality is the Gigafactory, which in partnership with Panasonic (PCRFY) will produce up to 500,000 lithium-ion batteries by 2020 — allowing for expanded production as well as better margins.
Wall Street Loves Growth: And by the way, before we start complaining about the fact that TSLA stock is valued at 80 times projected 2015 earnings, let’s remember this is a high-growth tech stock, and hardly the first of its kind to have that kind of valuation. Besides, frickin’ Chipotle (CMG) — a low-tech restaurant peddling tortillas and beans — is valued at a forward P/E of 40 right now. Why? Well, because there simply aren’t many companies out there that can grow earnings that dramatically and consistently … and investors are willing to pay a premium for that growth.
Shorts Can’t Win: As of the last quarter, wunderkind CEO Elon Musk owned 26.7% of outstanding Tesla common stock … and Musk has said that he will basically will never sell his stock. And hopelessly outgunned, the shorts have given up on Tesla — with short interest dropping from a peak of about 31.6 million shares to start the year to just 24.1 million currently after painful squeezes have punished traders.
Tesla Earnings: The icing on the cake is that Tesla earnings were quite strong, as sales beat estimates and the company delivered 17% more Tesla Model S sedans than in the last quarter, proving production is indeed ramping. Furthermore, the company also reported “customer deposits” of $228 million last quarter! There’s no way of knowing the precise breakdown of how much has been plunked down and on which models, but some math puts this order backlog at more than six months of production simply to deliver TSLA vehicles already ordered by eager customers!
It all adds up, to me, to another 60-day uptrend for Tesla as we continue to see favorable news about production capacity and targets.
We can debate how Elon Musk and Tesla will adapt and change strategies as this electric vehicle giant grows. But I remain convinced the short-term trend is soundly higher, and feel like buying Tesla at $260 and riding to $300 by Halloween is a no-brainer.
Where it will be after that is anyone’s guess … but with a momentum stock like Tesla, the important thing to do is swing trade this fad investment to profits, then figure out the next step in a few months.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.