Alongside the rest of the market, shares of red-hot Tesla (NASDAQ:TSLA) have finally cooled off in February on concerns that the rapidly spreading coronavirus from China could knock economic growth for the foreseeable future. Of particular concern to Tesla investors, the virus has hit hardest where Tesla needs growth the most over the next few years: China.
From its mid-February highs, Tesla stock has dropped 13%.
In the big picture, this dip will prove to be a buying opportunity into a long-term winner. But not quite yet. The timing isn’t right, and the numbers still don’t add up.
Instead, investors should wait for coronavirus fears to fade. They will. Soon. But they haven’t faded quite yet. At the same time, investors should wait for the valuation to fall back into tangible territory. It will. Soon. But it’s not quite there today.
So, my suggestion is simple. Buy Tesla stock below $700 once coronavirus fears fade, likely within a few weeks.
Coronavirus Fears Will Fade
Right now, coronavirus fears are roiling global financial markets, and stocks of all shapes and sizes are falling off a cliff.
But, these fears will pass, and likely quite soon.
To be sure, the coronavirus is a big, scary and volatile epidemic. But, it’s still just an epidemic. And, like all other epidemics over the past fifty years, it will pass, and not inflict any lasting damage on the global economy.
Specific to the coronavirus, some combination of warmer weather, strict quarantining measures, swift government response and quick progress on a vaccine (Gilead’s (NYSE:GILD) remdesivir treatment has been successful in treating coronavirus symptoms so far) will ultimately put to bed the coronavirus outbreak globally within the next few months.
That’s the good news. The better news is that, in response to the outbreak, interest rates across the globe have plunged to all-time lows, central banks everywhere have injected more stimulus into their economies, particularly the People’s Bank of China and trade tensions between the U.S. and China have meaningfully de-escalated.
So, once the coronavirus outbreak passes, the global economy will likely go through a sharp v-shaped recovery, supported by tremendous liquidity and increased geopolitical stability. No more is this true than in China, where a sharp bounce-back in the auto markets come mid-2020 will provide meaningfully large tailwinds for Tesla.
Tesla Stock Is Attractive at $700
With respect to the valuation on Tesla stock, shares unequivocally got overextended in early 2020 due to euphoria regarding the company’s ability to pioneer a global electric vehicle revolution over the next decade.
Make no mistake. That revolution is going to happen. By the end of the 2030, it is likely that somewhere north of 25% of cars sold will be electric, thanks to consumer demand changes and favorable legislation. At the same time, Tesla will be at the forefront of that revolution. The company is simply unrivaled in the electric vehicle space in terms of brand equity, battery tech and production capacity — no one is going to touch them anytime soon, and so the company will continue to be the market leader for the foreseeable future.
Having said all that, Tesla at a near $1,000 price tag priced in all of that growth potential … and then some.
By my numbers, assuming the electric vehicle world marches to 25%-plus penetration rates in a decade, Tesla sustains 10%-plus market share in that world, gross margins rise to 25%, and the expense rate drops to below 7% (all of which are fairly aggressive long-term assumptions), then Tesla will do about $100 in earnings per share by 2030.
Based on a market average 16-times forward earnings multiple and a 10% annual discount rate, that implies a 2020 price target for the stock of about $680. So, below $700, the valuation on Tesla stock starts to look attractive.
Bottom Line
Tesla got overextended. Now it’s pulling back. Let the pullback happen. Let coronavirus hysteria pass, and let the valuation come in. Then, once fears pass and the stock drops closer to $700, buy the dip.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by TipRanks, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.
