The higher and higher Tesla (NASDAQ:TSLA) shares go, the more and more one question remains: What new heights can Tesla stock reach?
The price and valuation on TSLA stock left any connection to its business behind long ago. The stock is caught in what may be the biggest stock market bubble of all time. Bulls are being forced to stretch further and further with their theses for why Tesla’s business should be worth more than $800 billion at any point in the next 30 years.
But I think there’s a very good chance Tesla stock has around 25% upside from its current level in the near term. That would take it to a $1 trillion market capitalization.
Tesla Stock Bull Case
I’m one of countless traders, analysts and experts who have repeatedly tried to pin down the Tesla stock bull argument. One of the first things I do when assessing a particular trading idea is by breaking down the counterargument. Personally, I believe Tesla is overvalued by at least 85%.
I enjoyed a recent story by MarketWatch’s Andrew Dickson in which he made the most generous assumptions about Tesla’s future to try to come up with a valid bull-case scenario. He assumed the following:
- Some 90% of the world’s vehicle sales will be fully electric by 2035;
- Tesla will have 20% global market share, two-thirds more share than currently held by any auto maker;
- CEO Elon Musk’s factories will produce 22 million vehicles in 2035, twice as many as any auto company produced in 2019;
- High-margin software will help Tesla generate 9% gross margins, higher than any car manufacturer is achieving; and,
- TSLA stock will earn $60 per share annually.
The upshot of Dickson’s assumptions? A projected bull case 2035 price target for Tesla of $1,230. In other words, in a best-case scenario, Tesla has about 45% upside potential over the next 15 years. That works out to about 2.5% upside per year.
I’ve made a similar argument in the past that Tesla bulls may be looking at 15 years or more of underperformance. That scenario would be similar to what played out for companies like Microsoft (NASDAQ:MSFT) following the dot-com bubble in 2000.
Rosy Scenario Won’t Hold
Tesla has been a tremendous success up to this point. I believe the company will likely continue to be a success in the future. I doubt it will be as successful as Dickson’s rosy scenario above. Tesla bulls would likely disagree.
Tesla stock, on the other hand, is a completely different story. The stock now has virtually nothing to do with Tesla’s underlying business. Whether intentional or not, Elon Musk has created a hype machine that appears perfectly crafted for idealistic investors with short attention spans.
Step one is unveiling a new product, like the Tesla Roadster back in 2017. Investors get all excited about the product and customers even put down $50,000 deposits on the product. More than three years later, no new Roadster. Tesla says it will be out in 2021. It previously said 2020. Who knows.
The point is that the hype machine has long since moved on to other products that don’t actually exist, like the Cybertruck.
Investors got all hyped up for Tesla’s solar roof back in 2016. It’s now 2021, and Tesla’s quarterly solar deployments are down about 75% from 2016 levels.
Tesla’s “Full Self Driving” software is actually Level 2 autonomy, while autonomous vehicle leader Waymo already has Level 4AVs available to the public.
Yet the Tesla hype machine rolls on. Competitors are actually taking note and adopting Musk’s strategy of faking it until you make it. General Motors (NYSE:GM) recently unveiled artist renderings of some absurd flying cars. As a GM investor myself, it felt a bit ridiculous. But it worked, and GM stock soared in response.
Tesla Stock Likely Headed Higher
Once a stock sheds the shackles of reality, there is no limit to how high its price can go. That idea is the basis for my belief that Tesla stock is headed above $1,000.
Technical traders know round numbers often serve as important support and resistance levels for stocks. Traders buy a stock and then choose a satisfying, yet completely arbitrary, round number as their selling point. Market bubbles have a long history of bursting at round numbers.
For TSLA stock, I think that satisfying, arbitrary round number may be a $1 trillion valuation, or about 25% upside for current levels. It doesn’t matter that Tesla’s business is only a small fraction of the size of Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), or Microsoft. I truly think TSLA stock investors believe that if Amazon — which actually delivers on its promises — is a $1 trillion business, Tesla can be too. That’s as deep as the reasoning goes.
Of course, I continue to believe Tesla stock is maybe the most dangerous stock to be long or short with at this point. The stock has at least 85% potential downside from current levels and nearly unlimited potential upside. It also has no attachment to its current valuation, meaning it could freely move up or down for any reason at any time. Or for no reason at all.
The only smart place to be when it comes to Tesla stock is the sidelines.
On the date of publication, Wayne Duggan held a long position in GM.
Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. He is the author of the book “Beating Wall Street With Common Sense,” which focuses on investing psychology and practical strategies to outperform the stock market.
