The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, Abbott Laboratories and AbbVie, La Monica does not own positions in any individual stocks.
Tesla's stock performance lately has been as electric as its Model S car. Shares are up more than 50% this year ... following a 335% surge in 2013!
So Tesla is either one of the most overvalued stocks trading right now or a screaming bargain, if you believe Elon Musk's company will really revolutionize the auto market in the next few years.
You might get more clarity when Tesla (TSLA) reports its latest earnings after the closing bell Thursday.
Wall Street analysts are expecting Tesla to post a sales increase of more than 46% in the second quarter, along with a small profit. But the numbers for the past three months aren't really what matter most to investors.
The main focus will be how many cars Tesla says it plans to deliver in the coming quarters. Investors will also be eager for more details about Tesla's gigafactory, a plant that will allow the company to produce more, lower-cost electric batteries that will be able to last longer between charges.
There have been several rumors on tech and automotive blogs in the past week that Tesla may announce that the gigafactory will be built in Nevada and that Tesla supplier Panasonic (PCRFY) may invest in it. The gigafactory could cost up to $5 billion to construct.
That's a lot of money. Even for Elon Musk -- the billionaire and creative muse for Robert Downey Jr.'s portrayal of Iron Man Tony Stark. (Will Tesla play some Black Sabbath as hold music before the conference call Thursday? Or maybe this great -- and strange -- jazz cover by The Bad Plus?)
Still, Tesla MUST make these types of investments. They are the key to its future success ... and it may be the reason why the stock is worth considering even though it trades at more than 200 times 2014 earnings estimates and nearly 75 times 2015 profit forecasts. (Roll over, value guru Benjamin Graham. Tell David Dodd the news.)
Investors have been excited about the rhapsodic reviews and sales for the Model S. Wall Street hopes the upcoming Model X crossover will be as big a hit.
But they really want the company's Model 3 or Model III (sadly not the Model E) mass-market car, which is likely due out in 2017 and expected to come with a price tag of about $35,000, to wow consumers.
The "cheaper" Tesla car is what Musk believes can turn the car maker into a true force to be reckoned with in the automotive world ... a legitimate powerhouse along the likes of Ford (F), General Motors (GM), Toyota (TM) and Honda (HMC), instead of just a "niche" electric car company.
Musk has an ambitious goal of 500,000 vehicle sales a year by 2020. To put that target in perspective, Tesla sold (or "delivered" in Tesla jargon) 22,450 Model S sedans last year.
Tesla will only be able to hit the half a million mark if it gets the gigafactory up and running soon. But one big Tesla bull thinks Musk's plan is doable. And that's why he believes the stock is still worth owning, valuation be damned.
Gilad Shany, an analyst with Baron Funds, says that if Tesla can sell 500,000 cars in 2020 ... and if you assume that the average selling price is around $50,000 to reflect a bigger portion of less pricey Model 3 sales than more expensive Model S and X vehicles ... then Tesla could wind up reporting $25 billion in annual sales.
He also thinks that Tesla's profit margins could be about 20%. Do the math and Tesla would be earning $5 billion. That's big league numbers, not start-up territory.
Shany works with the Baron Partners and Baron Opportunity Funds, which both own Tesla shares. He said those funds tend to own stocks for an average of seven years. So he's not going to bail on it because of what happens in one quarter.
"Tesla is the only auto company that can hire away from big tech companies in Silicon Valley. I know people who would die for a job at Tesla. That's a huge barrier for other auto companies to overcome," Shany said.
That all makes sense. But can Tesla really sell 500,000 electric cars in a world where gas guzzlers still rule the road? Shany said investors would be foolish to underestimate demand for electric vehicles.
Shany thinks the biggest factor holding back sales right now is the high price tag. He notes that two cheaper electric vehicles, the Nissan Leaf and BMW i3, have both had solid sales despite what he calls mediocre reviews for the Leaf and the fact that the i3 is meant to be a secondary "city driving" car.
Another valid point. But it still may be hard for average investors to wrap their head around the stock's lofty price. Cole Wilcox, CEO of Longboard Asset Management, said he no longer owns Tesla because he's concerned about the valuation. I spoke with Wilcox last year about why he liked Tesla so much.
But Wilcox said he sees better opportunities elsewhere in the electric vehicle market. His fund's second largest holding is BYD Company, a Chinese maker of electric cars and rechargeable batteries. That stock is expensive too ... the Hong Kong-listed shares trade at 52 times 2015 earnings estimates. But it's not as frothy as Tesla.
"This is the Tesla of China. The upside could be a lot bigger," Wilcox said.
But Wilcox is still a fan of Tesla's strategy ... and of Elon Musk. He said the only reason he sold is the high price. And even Musk has pointed out on occasion that Tesla's shares may be trading at a price that's higher than they deserve right now.
"I have no problem with the company. Tesla is still executing. Musk has done a fantastic job," Wilcox said. "But Tesla has a lot of work to do in order to grow into its valuation."
Well put. So if you are looking to trade Tesla, keep in mind that it is risky and volatile. There are still a substantial number of short sellers betting that the stock will go down. And even though shares are up a lot in 2014, the stock is about 15% off its all-time high. That could be a sign that momentum investors are nervous.
But if you are a long-term investor like Shany, then the stock could be worth it. Just don't panic if the stock plunges following earnings Thursday.
To quote Jim Morrison, keep your eyes on the road, your hands upon the wheel.
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