The rocket-ship ride in shares of electric vehicle maker Tesla (NASDAQ:TSLA) have hit some turbulence recently. After skyrocketing from $400 in early November to $900 by late January, TSLA stock has since gone sideways and down over the past few weeks on fears related to rising rates pressuring equity valuations. Today, the TSLA stock price sits around $700.
This dip is a golden buying opportunity.
Why? Three big reasons:
- The rising rates fear that is spooking the stock market — and specifically growth stocks like Tesla — is completely overblown. It will pass, soon, and without inflicting much more damage.
- Tesla stock at $700 is fundamentally undervalued relative to the company’s long-term earnings growth potential in the massive transportation, solar energy generation and renewable energy storage end-markets.
- The technicals underlying TSLA stock imply that shares are close to a near-term bottom, and will soon reverse course back into a healthy long-term uptrend.
All in all, it’s time to go ahead and buy the dip in TSLA stock.
TSLA Stock: Rising Rates Fear Is Overblown
The first reason to buy the dip in TSLA stock is because the catalyst for recent weakness — a sharp rise in the 10-Year Treasury yield — is overblown.
The benchmark 10-Year Treasury yield has risen sharply in February. It has gained almost 50 basis points. That’s a historically fast upswing in yields. And it’s troublesome for growth stocks, because valuations are inversely correlated to Treasury yields. In theory, higher yields mean lower valuations.
But yields have overshot their “fair value,” and will start to settle down in the coming months.
The 10-Year Treasury yield has, over the past five decades, closely tracked the 3-Month Treasury yield (a proxy for inflation, which the Fed controls with its target interest rate) plus real GDP growth.
The correlation is very, very strong. In today’s numbers, that means the 10-Year Treasury yield should finish 2021 at 2% — since the Fed has promised not to move on rate hikes (implying a near-zero 3-Month yield) and real GDP growth after the 2021 “bounce back” is projected at a 2% run-rate over the next few years.
0% 3-Month yield + 2% normalized real GDP growth = 2% 10-Year Treasury yield.
Now, importantly, the Fed has promised to remain on hold for three years, and there are massive deflationary forces via globalization and automation that should keep inflation muted for the foreseeable future. Thus, the 3-Month yield will likely hover around 0% for the next few years, while real GDP growth will continue to hover around 2%, meaning the “fair yield” on the 10-Year Treasury will remain around 2% for most of 2022 and 2023.
We are at 1.4% today. That means yields aren’t going to rise much over the next few years — and that the widespread rising rates fears today are completely overblown.
Yields will calm down. And soon. Once they do, growth stocks — like TSLA stock — will kick back into gear.
Tesla Stock Is Fundamentally Undervalued
The second big reason to buy the dip in TSLA stock is that shares are fundamentally undervalued today relative to the company’s long-term earnings growth potential.
What many folks misunderstand about Tesla is that this not just an electric vehicle maker. Yes, Tesla is the world’s most dominant EV maker. But in addition to that, Tesla has leveraged what made it the world’s most dominant electric vehicle maker — industry-leading alt energy battery technology — to create very strong solar energy generation and renewable energy storage businesses.
Long-term, then, Tesla is a renewable energy company, that is using industry-leading technology to power everything in our lives — from our cars, to our homes, to our offices. By 2030, many of us will have Tesla cars in our garages, Tesla solar panels on our roofs, and Tesla Powerwalls in our backyards.
Of course, that means the potential revenue and earnings upside in Tesla is enormous.
My numbers suggest that Tesla is on track to do about $110 in earnings per share by 2035. Based on a 25X forward earnings multiple and a 10% annual discount rate, that implies 2021 price target on TSLA stock of about $800.
Technical Support Is Here
The third big reason to buy the dip in TSLA stock is that technical support has arrived for the stock.
Specifically, Tesla’s 100-day moving average has served as a healthy support line for the stock amid its torrid rally over the past year. On Feb. 23, TSLA stock briefly dipped below that 100-day average, almost immediately popped right back above it, and has been on a mini-uptrend ever since.
This price action is technically indicative of a stock that just bottomed.
When this has happened previously with TSLA stock, the stock was in the process of going from near-term weakness back into long-term uptrend.
I don’t think this time will prove any different.
Bottom Line on TSLA Stock
Don’t overthink this one. Tesla is still redefining how the world uses energy to live. Nothing about that fundamental reality has changed over the past few weeks. Interest rates have just surged higher. They will stop surging, and soon. Once they do, TSLA stock will resume on its long-term uptrend. So, buy the dip in TSLA stock while prices are still discounted.
When all is said and done, Tesla stock is still one of the best growth stocks buy and hold for the long haul.
But it’s not the best growth stock to buy today.
Instead, the best growth stock to buy today is a company that reminds me of a young Amazon (NASDAQ:AMZN). Indeed, I think buying this stock today could be like buying AMZN stock back in 1997 — before it soared thousands of percent.
Which stock am I talking about?
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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