Oh, to be loved like bullish investors love Tesla (NASDAQ:TSLA). Tesla stock is up over 800% in the last 12 months.
At two separate points in 2020, Tesla bears looked like they were about to be proven right. The first dip took place at the onset of the Covid-19 pandemic. The second took place as part of the tech sell-off in September.
However in both cases, investors simply shrugged off the setbacks. As a result, investors have been robustly rewarded for their bullish convictions. In fact, as InvestorPlace’s Todd Shriber observed, in late December, Tesla short sellers had lost $39 billion during the year.
However increasingly I’m beginning to believe that many investors are simply taking a default position that reminds me of the popular idiom, “Even a stopped clock is right twice a day.” The scientific corollary to the idiom is that “correlation does not imply causation.”
And what does that have to do with Tesla? It means that just because Tesla bears have failed to be right about Tesla stock, you can’t simply rule it out. For that, investors must due their due diligence.
On the other hand, just because Tesla stock has continued to defy expectations does not mean it will continue to defy those expectations.
Tesla Is More Than a Car Company
On numerous occasions, I’ve opined that the truest Tesla believers that I know don’t view Tesla as an automobile manufacturer. They view the company as a technology company.
It’s similar to how Nancy Zevenbergen the founder of Zevenbergen Capital Investments views the company. Zevenbergen runs three mutual funds that rank in the top 1% or 2% of large growth funds. Tesla is one of three companies including Shopify (NYSE:SHOP) and MercadoLibre (NASDAQ:MELI) that fit Zevenbergen’s investment philosophy, part of which is to identify and invest in founder-led firms early and stick with them even in the tough times.
In an interview with Barron’s Zevenbergen said of Tesla’s founder Elon Musk,
He had a dream, and he got no industry support, just disdain. Now he’s obviously been able to build an electric car, and people are buying them around the world. He has software for autonomous driving and he has batteries … It’s more than just a car company; it’s potentially a component company, a software company, and an energy company.
The Why Still Matters
The problem with my stopped clock analogy is that it assumes a certain amount of intellectual curiosity. It suggests a desire to investigate and validate your assumptions. And that’s where (some) Tesla bulls lose me. For them, the why doesn’t matter.
Of course, the same can be said for some Tesla bears.
And in reality, the why probably doesn’t really matter. Stocks can continue to go up for irrational reasons. And after getting obliterated last year, the bearish investors seeking to short Tesla would be advised to not fight the trend.
However, assuming the why still matters, Tesla is making a compelling case. First, the company reversed a pattern of over promising and under delivering by launching its Model Y SUV months ahead of its stated timeline. Tesla is also showing investors that can scale up its production and showed positive free cash flow of $1.4 billion in its most recent quarter. All of which means that Tesla is likely to continue to over deliver in 2021.
On the other hand, there’s that thorny question of valuation. With a market cap of just over $800 billion, the company is trading at approximately 18x what analysts are forecasting for 2021 sales. If you look at trailing 12-month sales, the valuation is an even loftier 29x sales.
This is a company that has shown us to never say never. However supporting a valuation like that will require an additional catalyst that proves the whole of Tesla is greater than its existence as an electric vehicle manufacturer.
That’s if the why still matters.
The Bottom Line on Tesla Stock
I’m of the belief that investors are way out in front of Tesla. But if I’m honest I probably also wish I would’ve gotten on the gravy train. Nevertheless, the question is where does Tesla go from here?
If you get nothing else from this article, remember this. There are a lot of smart people on both sides of the Tesla argument. And the difference between looking like a genius or a fool is not set in stone.
Those that are looking to short Tesla stock only have to be right once. And that’s the time your why will matter.
On the date of publication Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Chris Markoch is a freelance financial copywriter who has been covering the market for seven years. He has been writing for Investor Place since 2019.