Despite falling from $500 per share to less than $400 today, Tesla (NASDAQ:TSLA) remains a very expensive name to own. But unlike in recent years, where a fall had it compared with stocks like General Motors (NYSE:GM) or even Toyota Motor (NYSE:TM), Tesla stock now has analyst support.
People like Oppenheimer analyst Colin Rusch and even TV analyst Jim Cramer counsel patience.
Tesla stock now has believers on Wall Street, who insist this is what CEO Elon Musk says it is – a tech stock, not a manufacturer.
The Key for Tesla Stock Is Batteries
The technology is batteries. I wrote years ago that Tesla’s challenge was to scale its manufacturing, but I was wrong. Others argued over whether assembly or computer components would rule the new car market. They were wrong too.
It turned out batteries were the technology that would rule the electric car market. While rivals like Volkswagen (OTCMKTS:VLKAY) are just starting to produce electric cars, Musk said at his Battery Day event that Tesla is ready to double battery efficiency.
Musk’s big announcement was a new battery called the 4680. Its electrodes will be dry-coated, its cells larger. Once the kinks are worked out, the 4680 will have five times the energy, 16% more range, and six times the power of older models. The new batteries will replace cobalt with nickel and their design will be integrated into the car’s structure instead of being a separate component.
A better battery means prices of electric cars can achieve parity with gas-powered vehicles across the board. With the new battery installed, Musk said his cars will start at just $25,000 in three years. But his firmest product announcement was a $140,000 model for 2021 that can go from zero to 60 mph in two seconds and run 520 miles on a single charge.
Tesla’s battery success has analysts dreaming even beyond where Musk is willing to go. A Tesla with a full battery pack can act as a home’s back-up power. Masses of Teslas can stabilize the electric grid itself.
Believe in Musk?
Tesla’s success in scaling has made it the hottest stock of 2020. Even with two sharp falls, which have taken the market with it, shares are up 363% on the year. Short interest that averaged 28% earlier in the year is down to 22%. This despite the fact that even assuming Tesla can hit its revenue forecast of $30 billion for 2020, it’s still selling at more than 11x revenue.
For the quarter ending this month, analysts are expecting revenue of $7.62 billion and (perhaps more important) a profit, 17 cents per share. For 2021 the estimate is for $42 billion in sales and net income of $3.18 per share.
That will still be just one-third the size of GM. But Tesla is now worth almost 10 times more than GM’s $41 billion, and could buy Ford (NYSE:F) 13 times over. Both GM and Ford are struggling for batteries in limited production. Tesla controls its supply chain.
While Musk has found himself associated with the Trump administration, he now has political power of his own. Tesla is suing the administration over its China tariffs. Tax breaks are fine, but free trade is finer for Tesla stock.
The Bottom Line
Tesla’s success with batteries has made it not just a dominant car company, but a dominant factor in electric technology.
What Tesla hasn’t done yet is deliver solar cells in enough quantity, and at a low enough price, to power its cars and close the loop on electricity. That remains just a promise. But fewer people are now betting he can’t do it.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at email@example.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.