Making an investment case for Tesla Motors Inc (NASDAQ:TSLA) is not that difficult. One only needs to look toward the future. Autonomous vehicles, connected cars, and cleaner/renewable energy are expected to be strong growth drivers in the years ahead. And those are two of Tesla’s main business segments. TSLA stock, then, should be in good hands.
At last week’s 2017 Consumer Electronics Show in Las Vegas, for instance, cars and auto technology played an even bigger role compared to three to five years ago. The show included keynotes or presentations from almost every major automaker and A-list auto suppliers.
In other words, Tesla — which arguably first intersected the auto and tech sectors — is in the right growth lane. While TSLA stock has yet to full respond to the growth drivers ahead, it’s only a matter a time.
Tesla Needs to Graduate From Potential
Still, Tesla’s toughest challenge is to prove to critics that it can graduate the business from one of “strong potential” to a money-making venture. To date, that has been prevailing attack on CEO Elon Musk and what has kept Tesla stock from driving meaningfully higher over the past couple years.
While Musk has delivered on the company’s new Gigafactory, which began production last week, Tesla again missed on its most recent quarterly vehicle production target — keeping up a track record TSLA has been trying to shed. That news sent TSLA shares down some 2%.
Tesla delivered roughly 22,200 vehicles during the last three months of 2016, falling short of the original projection of 25,000 units. For the full year, the electric car company delivered 76,230 units — also shy of the 80,000 vehicles Musk had promised to deliver.
From my glass-half-full perspective, the fact that Tesla came less than 4,000 units shy of its full-year total was encouraging. Critics, however, took the miss as more reasons to avoid TSLA stock.
Said Barclays analyst Brian Johnson last week:
“There is a high risk of execution missteps, a challenged track record on meeting timelines, cost challenges and potential impact from an otherwise full plate of initiatives in ’17.”
The Gigafactory Changes Things
Despite the noise, there’s also reason for increased optimism about Tesla stock. Notably, the new Gigafactory — which was delivered on time — could be the game-changer Tesla has needed.
Once completed, the Gigafactory will be the world’s largest factory of any kind, and eventually manufacture lithium-ion batteries for 500,000 vehicles annually, as well as for other purposes. Batteries are the limiting factor for electric cars, so Tesla’s fix is to single-handedly double the world’s lithium-ion battery production.
While the Gigafactory — which is less than a third complete, and is expected to be finished by 2018 — has been expensive to build, estimated at $5 billion, it will accelerate the pace at which Tesla can become profitable since the Gigafactory can boost margins on unit sales of the Model S and Model X (and eventually the Model 3).
At the same time, it’s possible that competing auto manufactures such as Ford Motor Company (NYSE:F) and General Motors Company (NYSE:GM) will rely on Tesla for their batteries.
Bottom Line for TSLA Stock
Tesla stock should be owned, not traded. While the company is spending tons of cash to deliver on its aggressive Model 3 production production totals for later this year, it’s tough to bet against Musk.
Assuming the company does reach its delivery target and begin Model 3 production this year, TSLA stock — currently at around $229 — is poised to regain its 2016 high of around $270.
That would come out to roughly 20% returns in 2017.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.
