When it comes to Tesla (NASDAQ:TSLA) and TSLA stock, Wall Street has truly gone from one extreme to the other. Back in October 2021, the shares had a gargantuan $1.2 trillion market capitalization, and the company could do nothing wrong and basically had no meaningful challenges in the eyes of the Street.
Fast forward just 15 months, and the shares’ market capitalization has plunged to less than $400 billion. And most on the Street have now decided that the automaker can do almost nothing right and will never be able to overcome its daunting challenges.
Not surprisingly, the truth — and the proper valuation for TSLA stock — lies roughly midway between the two extremes. But that means that Tesla is well-positioned to make a huge comeback in the coming weeks and months. Here are five reasons why that’s the case.
Tesla’s Brand Remains Extremely Powerful
It’s true that Tesla CEO Elon Musk’s actions at Twitter undermined Tesla’s brand among some hard-core Democrats and liberals in its home market of the U.S. But consider that, in 2020, only 25% of Americans identified as liberal.
If two-thirds of those Americans decide never to buy Teslas, the automaker’s potential customer base in the U.S. will have been cut by only roughly 17%. And that’s only among American consumers; it doesn’t factor in people and businesses in other nations and companies, the vast majority of whom are unlikely to be repelled enough by Musk’s policies at Twitter to avoid buying Tesla’s EVs.
So the impact of Musk’s moves at Twitter on Tesla’s overall business is likely to be low. And, among the vast majority of the company’s potential customers globally, its brand image as a high-class, extremely high-tech, aspirational EV maker is likely to remain firmly intact.
For evidence of that assertion, consider that Tesla’s global deliveries still jumped 40% year over year last quarter, while Morningstar recently reiterated its previous estimate that the automaker’s deliveries would exceed 5 million in the next seven years.
Further, Tesla’s Model Y was the best-selling vehicle of any type in Europe in November, and research firm Recurrent Auto predicted last month that Tesla’s Model Y would become the best-selling vehicle of any type in 2023. Finally, showing confidence in its own outlook, the automaker itself intends to spend over $700 million on expanding its battery factory in Texas.
Far Too Much Was Made of Tesla’s Price Cuts and Its China Shutdown
I’m not an economist or even a finance professional. But I did learn about the impact of supply and demand on price. Basically, if supply goes up and demand stays constant, prices will go down. So with the global supply of EVs rapidly increasing, nobody should be shocked that Tesla has had to cut its prices.
But the automaker’s operating income came in at $3.69 billion in the third quarter and $2.5 billion in Q2. As a result, Tesla can cut prices and continue raking in big profits. Moreover, its higher sales volumes will probably more than makes up for the pressure on its bottom line caused by the price reductions. And given its current, reasonable valuation, that dynamic should boost TSLA stock even if its margins drop slightly.
Meanwhile, as I reported previously, it turned out that the automaker only plans to shut its China factory for one more day than expected this month, probably in order to give its workers who had to cope with China’s intense coronavirus lockdowns a well-deserved, extra day off.
The Tesla Semi Is Likely to Be a Game Changer
Tesla’s new full-size truck has a number of impressive attributes that should enable it to sell like the proverbial “hotcakes.”
Most importantly, it can reportedly “save companies as much as $70,000 per year, compared with diesel-powered trucks.” And in a point that should differentiate it from most battery-electric competitors, it is able to carry “a full load 500 miles on a single charge” while it “has triple the power of any diesel truck,” Elon Musk reported. What’s more, the EV is reportedly much easier to operate than conventional trucks, making truck drivers’ jobs easier.
Also likely to make the Tesla Semi popular is that companies can lock in deals with utility companies for low electricity rates. On the other hand, with gasoline, firms are subject to the vagaries of the oil and gasoline markets.
Tesla Is Thriving From Selling Subscriptions
The same high technology that enables Tesla to update its EVs electronically is enabling it to sell subscriptions for its autonomous driving services and other software updates. The automaker also makes money from selling subscriptions to its fast-charging network.
In the future, I expect TSLA to start selling subscriptions to other services, such as security and highly detailed battery monitoring. These subscriptions, along with the automaker’s regulatory credits, generate high-margin revenue that boosts its bottom line.
Long gone are the days when TSLA stock traded for 15 times its revenue or 100 times its profits. With the shares now down to a relatively skinny price-earnings ratio of 22.6 times, Tesla’s valuation has actually become quite attractive.
On the publication date, Larry Ramer did not hold (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.