Why Tesla’s Stock Spike Makes Sense

Over the past 8 weeks Tesla Stock has been on a massive winning streak, which has hit a critical mass this past week.  Tesla is now valued at 4 times what it was at it’s low point in June of last year. Last week Tesla shot up briefly to almost $950 a share, then stabilized back to the $750 mark to end out the week  Some critics are saying that this doesn’t make sense and are even comparing this rise to Bitcoin.  They are wrong and here’s why.

Disclosure: I own Tesla shares that I purchased in 2016.  I saw that Tesla had a massive head start on batter technology and purpose built manufacturing for electric vehicles, as well as several other advantages detailed here.   I bought 60 shares of Tesla, which at time cost me around $200 a share.  These investments are inside retirement accounts and I plan to hold for the very long term.  Decades.

So Why Is Tesla’s Stock Spike Happening?

  1. Wall Street can only see 3 months ahead.  The stock market as a whole is geared towards short term thinking, not long term thinking.  While I was able to discern that Tesla would do really well 3 – 5 years in the future, Wall Street has to focus on next quarter results.  The narrative on Tesla has been that they are unprofitable and will never make money.  Well, For 2 quarters in a row Tesla greatly exceeded expectations on revenue and earnings, and projects profitability for all future quarters.  This change in the narrative of what happens in the next 3 months greatly affected Wall Street’s outlook on Tesla.
  2.  The short burn of the century: 2 years ago Elon Musk warned about this. Tesla has been the most shorted stock in the market for years.  To short a stock short sellers borrow shares from investment banks at the current rate, then sell them back in the future, ideally netting a major profit when the stock has fallen.  When stocks rise instead of fall the short sellers either have to pay the gain back to the investment banker or buy more shares to cover their position.  With how much of Tesla’s stock has been shorted this is a short squeeze taking place.
  3. The start of institutional buying:  Tesla has been growing at a massive pace for a decade, but has carried so much risk in the eyes of short term focused stock traders that most major indexes have avoided Tesla.  Now that Tesla has shown a profit for 2 quarters and the Chinese Gigafactory has been a spectacular success, actively managed growth stock mutual funds are starting to buy Tesla.  They don’t want to be left missing the boat on Tesla growth.
  4. There are few shares to be sold:  The stock market, just like any other market follows the rules of supply and demand.  If there are more buyers than sellers the price will go up.  Tesla’s stock owners are made up of a lot of true believers, like myself who are holding for the very long term.  If there are few sellers and many buyers, prices will rise.
  5. Tesla is not a car company: I keep seeing the Bears comparing Tesla to Ford and GM.  These are not valid comparisons.  They say that Ford and GM sell Millions of cars a year, while Tesla is projecting to only sell 500,000 in 2020.  This is true, but margins matter. If GM only makes $1,000 a car and Tesla makes $7,000 a car, then Tesla is far ahead.  Tesla also by the way is growing much, much faster than GM and Ford.  GM and Ford are making combustion engine vehicles and are set up to do that only. The electric cars they are making are a tiny percentage of their overall manufacturing capacity and they fall far short of Tesla’s vehicles.  Tesla is making only electric vehicles.  Tesla also makes battery storage products, solar roofs, operates by far the largest charging network on Earth, and has a massive head start in self driving tech. Analysts are starting to value Tesla as more than just a commodity care company.
  6. Index investing is coming:  Assuming continued profitability Tesla will join the S+P 500 this year. With a market cap of $150 Billion (my projection for end of Q2, Tesla is currently at $134 Billion) Tesla would have a weighting in the S+P 500 of around 0.53%.  With $9.9 Trillion bench marked to the S+P 500 then this represents $52.5 Billion of the stock that index funds would need to buy. This will cause all index funds tied to the S+P to purchase Tesla stock to hold in their portfolios.  This will cause a massive increase in Tesla stock, because as we stated earlier, there are very few sellers.
  7. Tesla Doesn’t Have To Advertise: Tesla spends $3 in advertising to sell a car, Ford spends $2,106 to sell a Lincoln.
  8. The Bandwagon:  When people see a stock going up, they want to jump on it.  Retail investors are trying to jump on the Tesla bandwagon now that things are going well and the stock is spiking.

Reasons Tesla Should Increase Even More:

Most of the above factors are focused on the short term.  On the long term Tesla is still greatly undervalued.

  1. Head start in electric vehicles and battery tech: Tesla is several years ahead in this regard, which is becoming obvious both in total volume that Tesla can produce and the cost advantages Tesla has invested heavily not only in mass battery production at the Gigafactory, but also in battery chemistry and architecture technology.
  2. Massive battery installations: Tesla offers grid stabilizing battery installations that are key for certain markets.  The massive battery in Australia paid for itself in under 2 years.  These batteries are scalable and install quickly, typically in under 90 days.
  3. Off Grid Islands: A few years ago Tesla showed what they can do on the island of T’au.  Typically small islands import in diesel fuel and burn it in generators for power.  This is extremely expensive and of course bad for the environment.  Many of these islands are also located in extremely sunny areas.  Equipping these islands with solar and massive battery backup has a major value proposition that Tesla can solve and earn a ton of money off of.
  4. Off Grid Homes: Having an off grid home has always been a DIY thing and takes a ton of planning and engineering to do.  With Tesla solar and powerwalls going off grid has never been easier.  Alternatively for grids tied systems the Tesla powerwall takes advantage of Time of Day billing. It buys power at night for a much lower rate and sells power back to the grid during the day for a higher amount. For many customers this arbitrage paired with solar can result in a net $0 electric bill, even with charging electric cars.
  5. The Supercharger network: Tesla has built an amazing charging network.  Think of Henry Ford owning all the gas stations.  Although Tesla has said the Supercharger network will never be a profit center, the network creates a huge moat for competitors.  Competing vehicles can not use the supercharger network, which gives Tesla a massive boost in sales.  In the future when Tesla has millions of vehicles on the road, they could sell access to electric vehicles made by competitors at a premium. Tesla is charging enough at Supercharger stations currently to pay for the electricity that is actually being used AND to fund the expansion of the network.
  6. The machine that makes the machine: Elon Musk has talked at length of concentrating on the machine that makes the machine.  The factory IS the product.  When we see that the Chinese Gigafactory went from an empty dirt field to a production capacity of 3,000 vehicles a week in under 1 year we are just getting a glimpse at the future. The Model Y is designed to be far easier to produce than the model 3.  It’s body goes from 70 individually welded parts to 1.  It’s wiring harness goes from 3,000 meters to 100 meters. The Cybertruck will be even more efficient to build, being stamped out of a roll of inexpensive steel as an exoskeleton instead of a body on frame design. Tesla is building factories extremely quickly that will be able to build vehicles extremely quickly and inexpensively.
  7. Autonomous taxis: Imagine Uber without drivers.  Autonomous robot taxis will change the world.  Once the software is at true self driving Tesla may focus on designing fleet vehicles to run the taxi service. The ROI on these autotaxis will be amazing.
  8. The Semi: The Tesla Semi has been on the back burner in favor of focusing on bring the Model 3 and the Model Y to market.  The Tesla Semi in mass production and with full self driving will completely transform the trucking industry.  When you look at the numbers the cost savings even with a driver are amazing, but if you take the driver out of the equation it changes everything.  One of the key moments in the initial reveal of the Semi is when Elon Musk states that this is cheaper than rail.  CHEAPER THAN RAIL.
  9. Exponential Growth: Tesla now does not need to raise money to expand.  The demand is there and the vehicles are amazing.  We could see 50% growth in vehicle sales for every year going forward. With the cybertruck starting price under $40,000 Tesla will soon be able to offer electric vehicles at a lower price point than internal combustion engine vehicles. This price advantage coupled with the fuel cost advantage will propel electric vehicles into the mainstream.

With all of these factors, Tesla may become the largest company in the world within a decade.  The largest bulls for Tesla Stock are talking about $7,000 in 2024.  That alone would make Tesla on par with the market cap of Apple today, valuing the company at around $1.2 Trillion.  Could they be wrong, absolutely.  But it is entirely possible, and probable that Tesla will see explosive growth going forward and may rival both Amazon’s and Apple’s growth over the past decade.

What do you think about Tesla’s stock spike and the path the company is on? In 2024 I will revisit this article with an update to see how Tesla stock fairs over the next 4 years.  

 

John C. started Action Economics in 2013 as a way to gain more knowledge on personal financial planning and to share that knowledge with others. Action Economics focuses on paying off the house, reducing taxes, and building wealth. John uses the free tool Personal Capital to track his net worth and posts quarterly updates on his finances. Check out the Action Economics archives section for all past posts.

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