I've moved from neutral on Tesla (NASDAQ:TSLA) at $317 two years ago, in Thinking Differently About Tesla, to long-term bullish at $300 in October 2018 (but cautious due to Fed tightening), in Yesla! Now I'm looking for the stock to perform bullishly, rejoining the S&P 500 (SPY) at new highs.
The reasons are both fundamental and technical. Beginning with the latter...
Here's TSLA's stock chart since it has been a public company, showing the surge during QE 3, notably during the acceleration phase when QE 3 was young, in late 2012 and 2013.
The Fed is back in QE mode, though the Fed says it will not push excess reserves especially high this time. Whether this "not-QE" or QE-lite will be brief as in QE 2 or lengthy as in QE 3 is to be determined by the Fed's assessment of the economy over time.
On Oct. 1, 2012, when QE 3 began, TSLA was around $30 and had gone nowhere for two years. It then went up more than 6X to August 2013. Of course, I'm not projecting such a move this time, but I think there's enough monetary juice that will flow long enough to allow TSLA to move well into all-time high territory within one year.
I'm only giving this analogy because:
The recent momentum thrust on Q3 earnings and the resumption of "not-QE" is a technical positive. The big picture chart is now pointing up again. This price surge has turned the 50, 150 and 200-day/week/month EMAs all positive or turning positive again.
TSLA stock is therefore reasonably "in gear" but attractive in that it's at a price it first reached 2 1/2 years ago.
The renewable energy space has been a tough place to make a buck. An Invesco Solar ETF (TAN) made a bearish-to-bullish transition this year, and TSLA has outperformed it on a 5-year stack. Owning an outperforming name in a sector that is on upswing tends to work in my experience.
In comparison, a hydro-carbon-based ETF (XLE) has made a bullish-to-bearish chart transition (XLE acted bullishly up to 2014). I think the following chart suggests who the upcoming winner is:
TSLA is a risk-on stock that is responding strongly to risk-on behavior from the Fed. It still has lots of shorts to force to cover, is in good technical shape suddenly, and its renewable energy peer group is acting better while the major oil and gas ETF is crumbling.
Now, let's go to the major fundamentals that I believe drive alpha. I am going to stay out of "the weeds" of all the many details that cumulatively affect the TSLA story, as I think they are largely discounted given the intense interest in TSLA and every product introduction.
However, my experience is that mega-trends and other big picture matters relevant to TSLA - such as an operational turnaround - tend to not be fully discounted. The following three sections delineate the main fundamental reasons I am long TSLA, looking for big gains.
I discussed the emerging victory of the TSLA mission in US public opinion in a Sept. 16 article, NextEra Energy: Trends And News Flow Keep Going Its Way. NEE and TSLA have similar business missions: help the world move toward renewable sources of energy.
As the first mover in its niches, TSLA's biggest battle is against the incumbent energy industry rather than other EV manufacturers or storage/rooftop solar companies.
The rising waters due to atmospheric CO2 levels argument is gaining sway, while the basic economics of renewable energy versus burning hydrocarbons improve.
NEE and TSLA are seeing their key "hearts and minds" argument sweeping large-scale dissent away, paving the way for a renewables revolution in which TSLA, NEE and other early movers stand to profit greatly.
Note, I am not proselytizing, simply observing. My money wants to be on the winning side, and I believe that TSLA is on the winning side (at least as far out in the future as I can see) in the most important battle, that of ideas.
Moving on to two company-specific big picture points...
To win big in a revolution, as Apple (AAPL) did with mobility computing/communication products, a company needs a suite of products that meet the needs of the new paradigm and ideally are distinctive and appealing.
TSLA has the distinctive vehicles that are purchased en masse in the US and internationally, with no advertising and no dealer network. This is quite a 'wow' achievement in my view and could only happen if TSLA has done quite a lot very right, beginning with product design and moving all the way to fulfillment and support. As shown later, TSLA has a learning curve lead over most of its wanna-be rivals, complementing its iconic brand name and generally satisfied customer base.
Next, TSLA has battery-driven energy storage products. While not especially sexy, if it continues to execute, they address immense markets.
Finally, TSLA has its solar energy production products, most notably the improved solarglass roof. Per the latest conference call on this reportedly easy-to-install, cost-effective next-gen version, the product will address a North American market of 5 million roofs per year. When paired with a Powerwall, this might involve a $60,000 purchase. Even a 5-10% share of the 5 million roof market would represent huge profit potential, and one that could be recurring, go international, and have horizontal and vertical expansion possibilities.
Elon Musk is saying the energy business may be larger than the vehicle business.
Later, I review some of the profit possibilities just from vehicles.
This is not all. While short sellers salivate, TSLA already has the Smart Summon feature that has been used a million times. Its iterative approach to its full self-driving goal is unique and may be on the verge of significant real world success. So there's much more that TSLA has done, including powertrain development, which could provide further profits if it licenses those technologies out or produces them for the EV industry at large.
Thus, TSLA has a unique and comprehensive product line in many key areas required for a carbon-neutral future. No other company does. And as with AAPL, TSLA's products are classy and undergo continual improvement.
This is the stuff of which a liquidity-driven bull market and short squeeze could be made. It also may allow more institutions to scale into TSLA.
Finally, and crucially...
Without this point, I'd still be mostly on the fence regarding TSLA. But TSLA is finally getting several things done properly. Model 3 production is ramping globally. Gigafactory 3 went up very rapidly in China. The Model Y is said to be on or ahead of schedule. The Semi is rumored to be ahead of schedule as well.
And, TSLA's important progress in the solar roof while doing all the above is impressive.
Next, a few additional points. The first is that...
In going long TSLA, I also focus on how strong or inept the competition may be. Current news on Daimler-Benz (OTCPK:DDAIF) is relevant.
From Autoblog.com, some quotes with my comments:
Manager Magazin also said Daimler plans to become a carbon neutral company by 2040, ensuring that all new cars, production methods and suppliers work in ways which do not produce carbon dioxide emissions.
My comment: Is Daimler serious? 2040?
This suggests to me that Daimler has an insufficient understanding of what's going on in the world of public opinion.
Back to the article for the blog's lead point:
FRANKFURT, Germany — Daimler is looking to make 6 billion euros ($6.75 billion) in cost cuts and efficiency gains by 2021 at Mercedes-Benz passenger cars and a further 2 billion euros at its Daimler Trucks division, Manager Magazin said on Thursday.
Around 10,000 jobs will be cut at Daimler...
So that's the headline, but look at another line in the blog (emphasis added):
Daimler said in February it would pursue cost saving measures after fourth-quarter operating profit plunged 22 percent, hit by trade wars, rising costs for developing electric cars and an industry downturn.
Rising costs related in (large?) part due to Daimler finding out (my interpretation) that developing and manufacturing a competitive electric vehicle is really, really hard. People who blame Elon Musk for this or that issue at TSLA may wish to reflect on Daimler's struggles and that of Porsche (OTCPK:POAHY).
For that, see this recent news item:
... as a result of the enormous complexity surrounding the production of Taycan, we must report that unfortunately the delivery dates are somewhat delayed.
My big picture interpretation: Competition to TSLA's EVs may be less fierce than thought, and delayed. It's good to be the king of the EV road...
With that thought in mind, some profit projections would be helpful.
Per the Amazon (AMZN) and Netflix (NFLX) examples, I'm not too concerned with what TSLA will earn next year or the year after. I'm mostly concerned about the trend favoring renewable energy, TSLA's growing product suite and technological capabilities regarding self-driving vehicles, the solar roof, and general revenue growth. If costs are higher to build for faster growth, then current-period profits will be depressed, but long term, value may be created.
That said, a forecast is helpful, speculative though it is.
Bloomberg New Energy Finance forecasts 28 MM EVs produced in 2030. If TSLA produces 6 MM of them at $40,000 per car, that's $240 B in sales and perhaps $36 B in after-tax profits.
The energy business is extra in this analysis and could be very large. Also, revenue from licensing powertrain or self-driving technology (or producing modules for competitors) could be significant and is not included in this calculation.
As BNEF is forecasting 56 MM EVs in 2040, TSLA would still be a growth stock in 2030 at the 28 MM EV production level. Thus, if TSLA were to trade at today's S&P 500 level of about 20X forward GAAP EPS, TSLA would be a $720 B market cap stock from vehicles alone. Assuming some dilution, that would be a 10X return in 10 years (26% CAGR).
With Elon Musk saying that the energy business may exceed the vehicle business, TSLA might just deliver the 35%+ CAGR to shareholders that it has done since its IPO.
Clearly, it is not necessary to project so much success for TSLA to generate enough alpha on a 10-year basis to be very rewarding to patient shareholders.
TSLA stock is volatile on its own, and the company's business prospects are highly uncertain. Please see the 10-K, 10-Q and other documents for TSLA's recitation of the many risks involved in owning its shares. The following are several of the most important risks I think about regarding TSLA:
1. General market tolerance for speculative stocks
The Fed began easing (encouraging risk-on behavior) early in 2001, but investors nonetheless let highly-valued tech stocks crash for the next two years even as the Fed got increasingly aggressive.
2. Elon Musk
Probably TSLA's greatest asset and simultaneously a significant risk. One more wayward tweet or oral statement and who knows how hard the SEC could come down on TSLA?
3. China - Gigafactory 3 and sales from it
If US-China relations truly sour, TSLA's vehicle production and sales in China could be harmed significantly. China has a nearly infinite number of tools with which it could impede TSLA, some more subtle than others.
4. China and other potential low-cost competition
The flip side of some old-line ICE vehicle manufacturers having growing pains in the EV industry is that some newbie out of China, India or elsewhere might be able to make a big dent in EV sales with aggressive pricing, thus harming TSLA in several ways down the road. This is not a "tomorrow" thing, but since all TSLA projections I have seen involve long term success, even a post-2025 arrival of a price-cutting competitor would damage my bullish thesis.
5. Slower uptake of EVs than projected
Since we do not know the future, we cannot be sure how the cause of renewable energy in general and EVs in specific will fare in 2025-30.
6. TSLA-specific mishaps
Just because TSLA is doing better on some projects this year does not mean that it will keep up the pace. If so, TSLA could end up just another innovator that did not quite make the grade.
As stated above, there are many more specific and general risk factors to owning TSLA shares. Probably even TSLA's 10-K cannot name them all.
My judgment right now is that the upside potential, both short term and long term, outweighs the downside risk. Only the passage of time will reveal the ongoing outcome of this classic dynamic common to all growth stocks.
In summary, TSLA is technically in good shape and fundamentals are moving its way, including the overarching fundamentals of the world's future energy supply and utilization. The company is addressing large, new markets with innovative, first-/best-in-class products and technologies. These products are not easy to match by competitors. Thus, TSLA appears to me to be well-positioned to continue to move up during the Fed's current "not-QE" money printing phase, and potentially reach a sort of lift-off phase as AAPL did some years ago and AMZN did more recently. That lift-off would take TSLA out of the realm of highly speculative and turn it into a stock that institutions could consider more easily as a prudent investment.
I look forward to commenting on TSLA after some months have passed.
Thanks for reading and sharing any comments you wish to contribute.
Submitted Sunday; futures not open. TSLA closed Friday $329.94, SPY $314.31.
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Disclosure: I am/we are long TSLA, NEE, SPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Not investment advice. I am not an investment adviser.