The Fundamentals on Tesla Stock Are Only Getting Better

The mainstream Tesla revolution has arrived on Main Street

Tesla Ends Year With More Than 3,000 Model 3s Still in Inventory: Electrek

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Wall Street seems to hate Tesla (NASDAQ:TSLA) stock. It hates the cash burn and the debt. It hates CEO Elon Musk’s Twitter (NYSE:TWTR) antics, and his unique ability to consistently over-promise and under-deliver. Overall, it just doesn’t like Tesla stock.

That is why Tesla stock essentially hasn’t made any material progress over the past two-plus years. In early 2016, this was a $250 stock. Then, there were a few big jumps and a few big drops. But, ultimately, Tesla stock made no progress. It is still a $250 stock today.

Time to forget about Tesla stock and move onto something else?

I don’t think so. Wall Street hates Tesla stock, but Main Street loves Tesla, and ultimately, Main Street will decide TSLA’s fate, not Wall Street. If Main Street adopts Tesla vehicles en masse, revenues will soar, the company will become profitable and Wall Street will be forced to buy up Tesla stock.

From where I sit, it looks like Main Street’s adoration of Tesla is just starting to go mainstream, thanks to Model 3 production and delivery ramp. As such, I think we are in the early stages of a mainstream Tesla revolution that will push Tesla stock significantly higher.

Granted, the stock still has huge risks, so this is a high-risk high-reward candidate. But, the rewards more than justify the risks, and ultimately, Tesla stock could be on the verge of a huge breakout here.

The TSLA Revolution Has Arrived

When it comes to Tesla stock, I don’t really care all that much about Musk’s tweets or SEC lawsuits or management turnover. All those things seem like optics concerns, and they don’t relate directly to the fundamentals. Ultimately, fundamentals drive stock prices, so for a long-term investment thesis, I ignore optics and focus on fundamentals.

Right now, the fundamentals supporting Tesla stock are really strong, and project to only get stronger. Thanks to huge production ramp in Q3, the Tesla Model 3 is now one of the best selling cars in America. Tesla Model 3 outsold all other small and midsize luxury cars in the U.S. in September 2018, and it wasn’t close. Tesla Model 3 car sales in September 2018 were above 24,000. Second place was the Lexus ES at just over 5,000.

Moreover, Tesla Model 3 was the fourth best selling overall car in the U.S. in September 2018. To put that in perspective, Tesla Model 3 was the 117th best selling overall car in the U.S. in September 2017. And, it’s not just the Model 3 that is climbing the rankings. Tesla Model S was the 31st best selling car in September 2018, versus 49th in September 2017.

In other words, Tesla cars aren’t just growing mind and market share, they are becoming some of the best-selling cars in America. As the EV revolution continues to gain mainstream traction, and Tesla continues to improve production capacity and broaden the product portfolio to include new cars, Tesla’s dominance atop the top-selling cars list will only grow.

From this perspective, it does seem like we are in the early stages of a mainstream Tesla revolution. Within the next five years, Tesla Model 3, Model S, Model X and Model Y, along with any other new Tesla vehicle, will likely be a top-50 selling car. In that world, Tesla dominates the the global automotive scene, and the company is worth substantially more than $45 billion.

At its peak, Toyota (NYSE:TM) had a market cap of $225 billion. If Tesla remains on its current trajectory, a valuation upwards of $200 billion seems likely within the next five to ten years.

But There Are Still Risks for Tesla Stock

Although I feel that the TSLA revolution has arrived and that Tesla stock offers enormous upside potential from current levels, I also acknowledge that there are multiple risks inherent to this growth narrative.

First, you have optics risk. Musk continues to tweet en masse. The SEC lawsuit has been settled, but there are murmurs they are looking for another lawsuit. Management turnover has become less dramatic, but with pressures at the company obviously high, turnover could become an issue at any point. In other words, these optics put a wild card in the mix that makes the stock unnecessarily risky.

Second, you have execution risk. Although Tesla has emerged as the clear leader in a burgeoning space, the company hasn’t reached escape velocity yet. A lot needs to happen to bridge the gap from having one car be a top-seller in one month, to having multiple cars dominate the automotive scene on a consistent basis. Management needs to execute extremely well, against the backdrop of rising competition, in order to realize the company’s big dream.

Third, you have financial risk. Tesla’s balance sheet is ugly, mismanaged and loaded with debt. That adds yet another risk into the fold. Plus, the company has yet to prove that it can be consistently profitable. Until that happens, Tesla stock will be weighed down by profit concerns.

Overall, then, Tesla stock has a lot of risks … but, it also has a ton of potential upside. Thus, this is a classic high-risk, high-reward stock.

Bottom Line on TSLA Stock

Tesla stock is high-risk, high-reward, but recent developments regarding Tesla car sales in the U.S. improve the stock’s reward profile while mitigating the risk profile. As such, I think now is a good time to own Tesla stock, so long as you understand the inherent risks.

As of this writing, Luke Lango was long TSLA. 

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