It has been a volatile past several months for automaker Tesla Inc (NASDAQ:TSLA).
The electric vehicle (EV) market pioneer has seen its stock price whipsaw violently between $250 and $360 so far in 2018. Sentiment started out 2018 red-hot. Then it got ice-cold.
And now, it looks like sentiment is normalizing to a more sustainable level that should help drive consistent upward performance in Tesla stock.
From this perspective, I think the storm has passed. This stock will continue to be exceptionally volatile, but the narrative is improving and the fundamentals point to further upside. This combination should lead to Tesla stock being an out-performer for the foreseeable future.
Here’s a deeper look.
Tesla Stock Narrative Is Improving
The narrative surrounding Tesla stock has been nothing short of wild this year.
Tesla stock entered the year on a high note. Abundant optimism regarding Model 3 production ramp and the company’s long-term vision of EV adoption en masse powered the stock to $360 highs in late February.
But then the storm hit.
Persistent Model 3 production delays weighed on investor sentiment, and highlighted the company’s ongoing credit and cash burn issues. To makes things worse, there were some major executive departures during this stretch and an awkward conference call between CEO Elon Musk and analysts that drew eerie comparisons to Enron.
All those headwinds converged at once, and drove Tesla stock down to $250 by early April. Shares remained largely below $300 over the next two months as production, credit, and credibility concerns hung over the stock.
It finally appears, though, that those concerns are dissipating, and the clouds are clearing to reveal what is a still robust long-term growth narrative.
Model 3 production is once again ramping, and presently sits at 3,000 vehicles per week. Musk reiterated recently that production should hit 5,000 per week by the end of June. With Model 3 production ramp back on track, concerns regarding cash burn and credit have taken a back seat.
Meanwhile, management has revealed plans for a Shanghai factory. Constructing such a factory would be a big boost to the international growth narrative as it would allow Tesla to avoid imports tariffs in China and maintain competitive prices in a competitive China EV market.
To add to optimism, Tesla revealed that its August software update will include full self-driving features, a promising twist in the automated driving narrative which has recently been plagued by accidents.
Overall, the growth narrative supporting Tesla stock is clearly inflecting upward, meaning that bulls are in control and the uptrend in this stock should persist.
Fundamentals Point to Further Upside
It also helps that the fundamentals point to further upside in Tesla stock.
The global EV market has huge growth potential. We are talking about a market that presently only accounts for a few percentage points of overall automobile sales. But over time, that share will inevitably grow to 10%, 15%, 20%, and higher as the EV revolution goes mainstream, thanks to legislation and investment.
Tesla is at the forefront of this revolution. While every automaker will inevitably pivot into EV production, Tesla was here first, and is the premiere name in the space. Moreover, Model 3 production ramp will be a huge driver of mass market EV adoption in the near and medium terms.
As such, as goes the EV market, so goes Tesla stock.
That is why I expect Tesla to grow revenues around 40% per year over the next several years from last year’s still relatively small $11.8 billion base. Operating margins should also zoom to 10%, assuming 25% gross margins and an automaker average 15% opex rate.
Under those assumptions, I think Tesla can net around $25 in earnings per share in five years. A market-average growth multiple of 20-times forward earnings on $25 implies a four-year forward price target of $500. A Facebook, Inc. (NADSAQ:FB) level multiple (25-times forward earnings) implies a four-year forward price target of $625.
Either way, Tesla stock is presently undervalued. A $500 price target discounted back by 10% per year equates to its present-day value of $340. A $625 price target discounted back by 10% per year equates to a present-day value of over $400.
Bottom Line on Tesla Stock
The narrative is improving on Tesla stock, implying that the current upward trend in the stock is here to stay. I also think that this rally is fundamentally supported at current levels, and am very comfortable owning this stock below $340.
As of this writing, Luke Lango was long TSLA and FB.