Despite the recent market correction, Tesla (NASDAQ:TSLA) has been on fire. It must drive its doubters crazy to see TSLA stock performing so well when the market is under pressure.
The S&P 500 suffered a peak-to-trough decline of 6.1% from its Sept. 2 high to the recent low. Tesla shares didn’t flinch when the market first rolled over, climbing to a multi-month high on Sept. 8.
However, shares did correct 7.3% from that figure, although on a closing basis, the correction bottomed with a decline of just 4.5%. This is important, because it shows that – at least during the current correction – Tesla’s dip was about in line with the S&P 500.
On the upside though, it’s been a different story. TSLA stock is up 17% from September lows and is up almost 12% from its Sept. 2 highs, the day the S&P 500 hit its high.
I think this relative strength can continue.
Tesla Is the Top EV Stock in Town
No one does it better than Tesla when it comes to electric vehicles. The stock has always traded with a high valuation and in earlier years, it was caked in controversy.
More recently though, the company has been turning in solid earnings reports (yes, I know, with EV credits boosting the bottom line), while generating solid delivery growth. It’s expanding in the U.S. with its Texas facility, as well as in Europe with its facility in Germany. Chinese production is going well, while Tesla works to boost its portfolio of vehicles.
While the EV boom and SPAC EV boom has been more of a flash in the pan – with many of these stocks exploding higher and falling hard – Tesla has been a rare beacon of strength.
Others relative strength stocks include General Motors (NYSE:GM) and Ford (NYSE:F).
In so many words, Tesla took the EV world to the next level and now everyone’s playing catch up.
However, it’s still difficult to expand on the current valuation for TSLA stock. With an $825 billion market cap, many people only look at Tesla as an automaker. As such, they’ll readily point out that Tesla’s market cap is larger than the next seven largest automakers combined.
That is a heady valuation, but what many people fail to realize is that Tesla does more than make EVs. It also has an entire energy unit. Does that mean it should trade to a $1 trillion market cap?
Not necessarily, but it at least takes away some of the argument that all Tesla does is produce vehicles.
Breaking Down TSLA Stock
For the year, analysts expect Tesla to generate just over $50 billion in sales. If achieved, it will represent about 60% growth versus last year. In 2022, estimates call for roughly $70 billion in revenue, then $82.7 billion in sales in 2023.
Friends, if Tesla starts churning out $100-plus billion in revenue, it’s going to be very hard to ignore it.
Earnings are growing at an impressive clip – estimates call for 144% growth this year and 35% growth next year – but that doesn’t mean Tesla’s P/E ratio is rational.
The first thing to keep in mind is that this is a cult stock. Investors and traders flock to these types of names and it becomes an emotional battleground between bulls and bears. Cult stocks almost always come with a high valuation.
Second, keep in mind that CEO Elon Musk owns more than 227 million shares. That’s roughly double the top 10 mutual fund holdings combined, and more than the top eight hedge funds combined.
That’s also more than 20% of the company’s ~1 billion shares outstanding. In a way, that’s like shrinking the float, making things tighter and more susceptible to upside squeezes.
Trading Tesla
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I like to blend the technicals and the fundamentals, and in most cases, in that order.
When it comes to the charts, I can see the bullish trend. It’s been that way for a while and we’ve been hammering Tesla in the Top Stock Trades column.
Unlike Nio (NYSE:NIO) and many other EV plays, Tesla’s trend has been to the upside. Justifying a $1 trillion market cap is not easy. But it’s the valuation we get if the stock gets to roughly $1,000, which there is a path to doing so.
If you look at the chart above, you’ll notice that Tesla bottomed in mid-May, but did not make new lows like most growth stocks. The stock then reclaimed the 200-day moving average and ground higher along this mark.
Along the way, notice how Tesla found resistance, consolidated, then broke out over it. Most recently, we have a breakout over $800 and now a move over the 78.6% retracement. We have “blue skies” ahead, with $880 in play, followed by $900.
If TSLA stock can clear $900, it’s very possible that $1,000 acts as a magnet. No part of me would be surprised to see this level hit in the coming quarters.
TSLA stock is now up for eight straight weeks and the momentum has been robust. For now, pullbacks are buying opportunities, as Tesla could be marching back to the highs and potentially to $1,000.
As long as it continues to churn out strong growth and solid delivery results, what catalyst will the bears have to lean on? If it’s valuation, well, that argument has grown tired over the years.
On the date of publication, Bret Kenwell did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell.
