I’ve been a bull on Tesla (NASDAQ:TSLA) for years now. But even I have to admit that I didn’t see the 2020 rally in TSLA stock coming.
Incredibly, the stock has gained almost 700% so far this year. It also joined the prestigious S&P 500 and now has a market capitalization over $600 billion, making it one of the most valuable companies listed on U.S. exchanges.
That rally has attracted even more skeptics to a stock that long has been a target of short-sellers. Those short-sellers have been absolutely crushed in 2020, but many see a reversal in TSLA as inevitable. And even those that aren’t short on the stock might look at it now and have legitimate valuation questions.
After all, this is a car company trading at 164 times forward earnings. That’s a massive and basically unprecedented multiple. Combine that valuation with the staggering rally this year and some investors might write off TSLA stock as simply too expensive.
But I don’t believe that’s the right way to look at it — for a number of reasons.
TSLA Stock, EVs and AVs
The core of the bull case for Tesla obviously centers on its automotive business. Right now, the company is an unquestioned leader in electric vehicles (EVs) space and demand for its products has held up even amid the pandemic. Even with legacy automakers taking their shots, Tesla’s market share remains intact.
That alone creates a massive opportunity. EVs accounted for just 2.5% of the market in 2019. Thanks to government subsidies and increased environmental awareness, though, that number is going to rise steadily for not just years, but decades. As the market leader, TSLA stock is going to ride that wave.
So, yes, this name looks expensive based on 2021 estimated earnings. But we’re not buying Tesla for a year’s worth of profits. From a long-term perspective, the stock isn’t necessarily too expensive if those profits grow at a rapid clip. The market alone can provide that growth.
Meanwhile, there’s another catalyst on the way: autonomous vehicles. There’s more competition in that space, but Tesla also looks like the early leader there.
Admittedly, CEO Elon Musk promised one million “robo-taxis” on the road by this year. Tesla won’t hit that goal. But Musk has been aggressive in his promises many times before. Each time, he delivers, if perhaps just off schedule. I don’t think this time will be any different.
Not Just a Car Company
After the monster rally this year, skeptics might counter that the recent success in the automotive business is already priced into TSLA stock — and then some. The industry is massive worldwide, but auto-manufacturing isn’t as profitable a business as software, for instance.
But it’s incorrect to believe that Tesla is just a car company. In fact, it already has other lines of business. For one, the solar segment is seen as a disappointment, but it’s actually growing nicely. The company’s Energy Generation and Storage segment increased revenue 13% in the first nine months of this year, despite the pandemic. In the third quarter, as some normalcy returned, revenue also rose a sharp 44% year-over-year (YOY).
So, there’s still a massive potential market there, particularly on the under-covered energy storage side of the business. On top of that, the autonomous opportunity will open up new profit streams. Plus, the firm’s proprietary software and chips could have value to a third party, or even in applications outside of vehicles.
Right now, Tesla essentially is just a car company at first glance. But, as with valuation, investors need to take the long view and consider the EV maker’s capacity to diversify. Those long-term efforts have short-term value. Investors shouldn’t ignore them.
Let Tesla Run
I’m not going to sit here and pretend that TSLA stock is “cheap,” however an investor chooses to define that. Nor do I expect the stock to rally another 700% in 2021. But that doesn’t mean the rally is over. In fact, far from it.
Investors should take a lesson from 2020’s market in particular and the last few years more broadly. Basically, selling the best companies over valuation concerns has been a foolhardy strategy. On top of that, shorting those companies has been financial suicide.
There are those who argue that the trend simply has to end. They see TSLA as the epitome of the “bubble” in the market, fueled by traders on Robinhood and misplaced interest rates by the Federal Reserve.
In theory, they’re correct. But in practice — as I’ve written many times of late — too expensive is not the right reason to sell.
That might change at some point. In the meantime, though, I don’t expect Tesla stock will be the exception to that rule. Taking the long view, there’s no reason why one of the world’s most innovative companies can’t continue to be one of the most valuable.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.
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