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Is the Tesla stock worth owning for the long-term?

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Is the Tesla stock worth owning for the long-term?

Introduction

This article was posted on Wednesday, 11:09, UTC.

Tesla’s stock has seen huge volatility in 2017. The stock rose from about $215 at the start of the year to hit a high of $386.99 on June 23 – an increase of 80%. Thereafter, it fell more than 21% within a matter of 15 days. Tesla is a difficult stock to analyze as the usual valuation metrics don’t apply to it.

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Key observations

  • Tesla is changing the way we drive but it will take time for the change to happen
  • Tesla’s cars are popular in their segment
  • Model 3 is the key for the company’s future
  • The company is diversifying beyond manufacturing cars
  • Electric vehicle competition is heating up
  • At the current valuation, Tesla can’t afford any errors
  • Due to high risk and uncertainty, it is better to avoid this stock as a long-term bet

Out of the 16 analysts who offer a 12-month target price for Tesla Inc, the highest is $464, while the lowest is $155 and the median is $309.5. It has seven outperform/buy recommendations and seven underperform/sell recommendations. Nine analysts rate the stock as a hold. That shows the extent of division among the analysts.

But why is there such a large disparity in analysts’ expectations?

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Tesla is a disruptive technology

Tesla is not like any other automobile company that manufactures and sells cars. It is attempting to revolutionize the sector and change the way we drive. In pursuing this dream, the company will stumble along the way and face numerous roadblocks. Therefore, to analyze Tesla with the same performance metrics as the other car manufacturers is a futile exercise.

The believers in the company are confident that Tesla will be able to achieve its objective and assume a leadership position in the future. Hence, they are valuing Tesla with a high premium compared to the other automakers.

The non-believers, on the other hand, feel that the other automobile manufacturers will catch up with Tesla, which will prevent it from commanding a sizeable lead over other companies. Hence, they have valued Tesla like any other car company.

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So, as investors, what should we do?

Before we dive into the specific details of Tesla, let’s first check the market share of electric vehicles out of the total car sales.

Current market share of electric cars

Globally, the number of electric vehicles in 2016 rose to 2 million, an increase of 60% over the previous year, according to the International Energy Agency (IEA).

However, even with the increase, the total share of the plug-in and battery-operated vehicles is only a minuscule 0.2% of the total light-duty vehicles sold. Nevertheless, the numbers will increase in the years ahead, as various countries move towards reducing pollution.

Electric Vehicle Initiative is a program involving major developed nations like the US, China, parts of Europe and the UK, which aims to increase the market share of electric vehicles to 30% by 2030. India, though not a part of the above group – but has more than a billion in population and a growing middle class – has said that it wants to sell only electric cars by the end of the next decade.

Optimistic figure by BP Chief Economist Spencer Dale is for the electric vehicle market to grow to 450 million by 2035. The future for electric vehicles looks promising.

Is Tesla a leader in its segment?

Source: Inside EVs

The monthly sales figures above show that two of Tesla’s models are among the top 5 selling electric cars in the US. This shows that the current models of Tesla are popular and in demand.

But, what does the analyst community expect from Tesla in the future?

Tesla invests heavily in R&D and is a leader in revolutionizing the plug-in technology. The efforts of today will benefit Tesla in the future to sell more cars.

The latest Long-Term Electric Vehicle Outlook by Bloomberg New Energy Finance puts Tesla in the driver’s seat and expects it to emerge as “the stand-out” with total sales of 709,000 vehicles by 2021.

“If they can stick to the Model 3 timeline, they’re going to be at the front edge of this for a while,” BNEF analyst Colin McKerracher said of Tesla in a phone interview to Bloomberg.

As shown above, expectations are that Tesla will extend its lead over the other car makers in the next five years.

Huge expectations from the Model 3 launch

Currently, the deliveries of the two cars, Model S and Model X has plateaued for the past four quarters. However, there is a huge expectation from the new car, Model 3.

This is the car that is likely to boost Tesla’s car sales exponentially, because it has been priced attractively at $35,000, way lower than its two current offerings. This helps a number of people to own a top-class electric car at an affordable price. Its popularity can be gauged from the 400,000 pre-orders – people who have paid to reserve a Model 3 car.

Elon Musk’s tweets confirm that the first delivery of 30 cars will be given to the lucky owners on July 28. Thereafter, in August, the company expects to manufacture 100 units and increase it to 1500 in September. It hopes to reach 20,000 cars by the end of the year.

Eventually, The Verge expects Tesla to manufacture 500,000 cars annually. Therefore, the next few months will be important for Tesla.

The user reviews of the new car and the company’s ability to meet production timelines will affect its stock price.

Tesla is planning to expand beyond manufacturing cars

While valuing Tesla, one should keep in mind that it isn’t only a car manufacturing company. In order to realize the dream of electrifying the way we travel, Tesla had to bring down the cost of the Lithium-ion batteries and also mass produce them.

This led to the birth of Gigafactory, a facility, which will have a capacity of up to 35 gigawatt hours of cell production and 50 gigawatt hours of pack production by 2018, reports Bloomberg.

Tesla plans to manufacture battery packs for homes and for backup of the electric grid. It has already inked a deal to supply 20 megawatts/80 megawatt-hours of energy storage to Southern California Edison.

Tesla’s purchase of SolarCity Corp., underlines its goal to become a clean-energy company in the future.

What are Tesla’s competitors doing?

While Tesla is out to change the way we drive, the traditional automakers have taken note of the changing requirement of the public for a cleaner vehicle.

Therefore, the big auto companies like General Motors, Nissan, Ford, Toyota are also jumping into this fray with their own electric or plug-in hybrid cars.

Volvo, the Swedish car manufacturer, owned by the Chinese automotive conglomerate Geely, has gone a step ahead. In a recent press release, it announced that every car launched by Volvo from 2019 will have an electric motor – both fully electric cars and hybrid cars.

“This is about the customer,” said Håkan Samuelsson, president and chief executive.

“People increasingly demand electrified cars and we want to respond to our customers’ current and future needs. You can now pick and choose whichever electrified Volvo you wish.”

Other than this there are a number of new startups who have jumped into the fray.

Therefore, Tesla will not have it easy. It will have to weather increasing competition from the traditional automakers and startups. Hence, the market will watch the performance of every electric car – both Tesla’s and its competitors – to justify the premium valuation Tesla enjoys.

Tesla has a very small room for error. Any failure can start a deeper correction in the stock, similar to the one that started on July 3.

Technically, what does Tesla’s chart predict?

Tesla was trading in a range for more than three years. It finally broke out of it in April of this year. From there, the stock had a near vertical rally, rising about 35% within a matter of a few weeks. In doing so, it came very close to its target objective of $396, where it saw a bout of profit booking.

Nevertheless, any breakout of a long consolidation, pulls back and retests the breakout level. Tesla’s stock is currently doing that. It remains bullish as long as it trades above the $280 levels. However, since the fall from the highs of $386.95 has been vicious, it’s better to wait for some kind of a consolidation before entering any fresh long positions.

Conclusion

Tesla is attempting to change the way we drive; however, it is still in early stages of that change and will not turn a decent profit for a few more quarters. Therefore, its valuation will only be decided on its future prospects. The investor has to be up to date with every news related to the stock, because with its current valuation, it cannot afford any misstep. With too many variables attached to the stock, it is better to avoid it as a long-term investment. The investors can look at more stable stocks with a clearer earnings projection for their long-term portfolio.

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Rakesh Upadhyay

Rakesh Upadhyay

Rakesh Upadhyay is a Technical Analyst and Portfolio Consultant for The Summit Group. He has more than a decade of experience as a private trader. His philosophy is to use technical analysis for momentum trading and fundamental analysis for long-term positions. Rakesh likes to keep himself fit by lifting weights and considers himself to be a spiritual person.

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