Talking Stocks: Tesla Inc.
Is it finally time to BUY?
Within the last week itself, Tesla's stock price has skyrocketed almost 60%, bringing investors of even the highest calibre into complete disregard: why is this happening?
A myriad of institutions have had their say on the electric car maker, and even though the investing community is torn between buying and selling, young investors can still benefit from placing their own judgement and analysis on this company.
To summarize the key aspects surrounding Tesla's performance, here are TDP's thoughts on the tech giant's stance in the market.
It’s no secret that Tesla has a reputation for being one of the most volatile stocks on the market: but why does this happen in the first place?
It comes down to the underlying financials of the company, in particular, the company’s profitability and therefore, earnings per share (EPS).
Figure 1: Tesla’s Revenue and Net Income:
Source: (Etoro, 2019)
As depicted above, the discrepancy between Total Revenue and Net Income (profitability) is indisputable: i.e. there is far too little profit for the amount of revenue that the company makes. This implies that Tesla’s costs are extremely high, and the fact that these are forecasted to only grow further creates uncertainty in the market: can the company ever become consistently profitable?
This uncertainty leads to fluctuating demand for Tesla stock, and this is supremely what causes Tesla to be more volatile than other major companies.
While this may be the case in usual circumstances, we have seen a tantalizing change in behavior from Tesla’s stock price over the last several months.
Figure 2: Tesla Stock Price (trailing 3 months)
Source: (The Motley Fool, 2020)
In the illustration above, we’re seeing far more steady growth with Tesla: with the company retaining its levels even when the markets turned draconian due to the US-China trade war. This perhaps suggests that Tesla’s fundamentals have improved in the recent quarters, and the fact that they now pose positive profitability as well as optimistic growth forecasts allows the stock to be steady even during poor economic periods.
Thus, whilst poor fundamentals were associated with Tesla in the past, we may be seeing some profitable redemption in the coming quarters.
2. The People Behind the Product
Whilst the inherent characteristics we generally look for may not be here, there are aspects to Tesla that still make it an attractive company. Elon Musk – being one of most visionary leaders behind the products – is certainly one of these features.
Musk’s reputation for unflinching risk as well as disruptive thinking has slowly begun to take control of the tech market and Tesla’s stock price as a whole. The fact that he has repeatedly guided the company towards growth after setbacks depicts his influence over Tesla, and this heavily plays into the psychology of investors.
Figure 4: Graphical Depiction of Tesla's Volatility
Source: (MarketWatch, 2020)
The level of volatility above substantiates how Tesla can be now considered a “faith stock”, which is a term coined by analysts as an investment that heavily relies on riding out storms and trusting the leaders of a company. This means that investors are now willing to suffer volatility and short-term setbacks, due to the assumption that the people behind the product will still drive the company towards long term growth.
Is this a winning strategy? Only one way to find out…
3. Future Forecasts
Given the optimistic move towards electric cars and a healthier planet, we can assume that demand for Tesla vehicles is likely to grow over the next few years. More specifically, analysts forecast that the electric car market will grow from “$118 billion in 2017 to $567 billion by 2025”. This represents a 22.3% growth rate year-over-year, and therefore substantiates the "bullish" outlook on Tesla's future.
Figure 5: Growth Forecasts for Tesla Vehicles
Source: (Forbes, 2019)
So…who is this stock for?
In the short term, the ravenous volatility of Tesla allows day traders to pick up profits on the way up and all the way down: both of which would pay handsomely if the investments were well-timed. The only issue here is: what’s the likelihood of young investors timing this correctly?
Give or take a few…the answer is close to zero.
Hence, short-term investors may be better off staying away from Tesla, because timing the market correctly is something that even the most diligent investors struggle with. Contrastingly, long-term investors can see Tesla as a profitably opportunity, as growth in the electric car market gives rise to demand for Tesla stock. With this level of dynamic, Tesla could be seeing an extremely bright future in the stock market.
Overall, young investors can pursue the positive momentum of Tesla in the short run, but this would be at the risk of high volatility. In the long run, the growth in the market as well as the consumer shift towards environmentally-friendly cars may stimulate Tesla's stock price, and this is when we would see Tesla begin to consistently profit and steadily grow in share prices..