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Tesla (NASDAQ:TSLA) has been on fire for the last three months. On March 1st, the stock closed at only 34.65. On May 28th, it closed at 110.33, up 218% from March 1st. Heck, just in the month of May it has gained around 100%. The stock has been the subject of a lot of criticism lately: its forward PE for the fiscal year ending in 2014 is currently 106, according to Yahoo finance.

But despite the high PE and incredible recent gains, let's examine what reasons the bulls could still have to be optimistic.

It's easy to find positive news to be excited about. Just in the last month, Tesla delivered an earnings surprise of 200%, paid off a DOE loan way ahead of schedule, CEO Elon Musk bought $100 million shares, it announced the expansion of the supercharger network, the Model S got a 99/100 rating from Consumer Reports, and a Goldman Sachs analyst visiting a manufacturing plant gave mostly bullish signs. If you were short Tesla this last month, you've probably cringed more than a few times when looking at the news.

But there are several ways Tesla could still surprise us. First, the margins. Tesla has long said 25% gross margins on the Model S are a goal. This last quarter, total gross margin was 17%, up from 8% the previous quarter. But excluding revenue from zero emission vehicle (ZEV) credits (which Tesla expects to be zero by Q4), the gross profit on the Model S was probably closer to 5% for the quarter. If we figure an average Model S sales price of $70,000, this means Tesla will have to find $14,000 of cost savings per car. That seems difficult.

But it's worth noting that it's wrong to assume Tesla is starting from a base of 5 or 6% profitability going into this next quarter. As Elon Musk pointed out on the Q1 conference call, the margin reported is the average for the quarter. In his own words, "the gross margin at the end of Q1 was significantly better than at the beginning of Q1." So perhaps Tesla was operating at closer to a 10% gross margin going into Q2.

Analyst expectations have Tesla hitting 22-23% gross margins, but not quite 25%. Elon Musk said he considers it "likely" that Tesla would be at 25% margins on average over Q4. Personally, I'd tend to believe Elon's word will be good, and Tesla will hit that number, surpassing analyst expectations.

Another interesting tidbit from the most recent shareholder letter that I haven't heard anyone mention was this odd statement:

We recognized 4,900 vehicles as revenue, exceeding our initial Q1 guidance of 4,500, despite physically delivering a higher number of vehicles, as the standard for revenue recognition was extremely high. Even if a car was received, fully paid for and signed off as good by a customer, we did not recognize the revenue if the paperwork was incorrect.

What? What are we to make of that? How many cars were physically delivered, signed off, and paid for but not recognized as revenue? I don't know, but it gives an impression that Tesla may have been sandbagging their earnings a bit. Perhaps they did that to bump up their recognized revenue in Q2, so they could beat expectations again. This is obviously just speculation, it may be nothing, but I don't think it would be a shock if they were doing something of the sort. Apple, another company with a very strong brand appeal and a loyal fan base (though perhaps weakening of late) used to sandbag earnings forecasts all the time during that stock's heyday. Perhaps Tesla is doing the same thing.

After all, Tesla has a lot to gain from beating expectations again: it's their brand. Beating expectations makes them cool. Wouldn't you rather buy a car from a growing company, that's all the buzz in the media and gaining popularity? And if you're a young engineer, wouldn't you rather work for a company like Tesla, that's beating expectations while trying to change the world? I think the same effect may have worked to Apple's favor.

And then there's the unknown of Europe and Asia. The stock recently jumped after a Goldman Sachs note in which demand from Europe was seen to be about 200/week. This is without any supercharger stations over there, and without delivering a single car there. By the end of Q3, I expect demand could be much higher than that. And Asia is another huge wild card.

While the forward PE for Tesla of 106 is high, it doesn't seem completely crazy to me. After all, Tesla's vision is pretty big. If Tesla catches on in foreign markets, and hits or exceeds its margin targets, it could easily pass analyst earnings expectations, and it still has plenty of room to grow. Its market cap is only $12 billion -- compare that with Ford (NYSE:F) at $61 billion, Honda (NYSE:HMC) at $70 billion, Nissan (OTCPK:NSANY) at $91 billion, or Toyota (NYSE:TM) $189 billion. Yes I know, those companies have been around much longer than Tesla. And yes I know those companies have far greater manufacturing volume than Tesla. But if electric vehicles end up being the way of the future in 5 or 10 years, Tesla stands to gain an enormous amount.

There is still this sort of stigma about electric vehicles that makes people hesitant to get them. I laugh a little on the inside when I see someone driving a Nissan Leaf, it just seems like a puny little car. I think Tesla is the first company to really make an electric car sexy. Heck, the Model X is even planned to have Falcon Wing doors! In this respect, I think Tesla is a real game changer for the auto industry. As the supercharger network expands and Tesla improves the driving range and develops lower price vehicles, I see potential for the electric car market to grow hugely. And I see Tesla leading that expansion.

I was long Tesla at $34. I've been long ever since. I've thought about selling and waiting for a dip a few times on the way up, but I haven't, because I follow the policy that you should let your winners run. I don't doubt the share price is due for a correction at some point, maybe a big one, and when I start to see signs of that I'll run. Hopefully I won't be too late. But until I see bigger signs of that, I'm going to ride it out and see what happens.

Source: Could Tesla Go Higher?