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At any moment, a small group of fashionable, fast-moving investment ideas captivate Wall Street. Think marijuana stocks or the blockchain bandwagon (recall how Overstock.com jumped on that one) as prime examples of investing fads that stuffed your newsfeed for months during the last year or two .
These hyped-up themes tend to be driven by narrative, not fundamentals, and are perfect fodder for speculation. But eventually, hard facts or simple impatience takes its toll and the high-flying stocks fall out of favor.
On the surface, it’s tempting to lump in Tesla TSLA, -0.66% with other fad investment themes. It’s a wildly volatile stock, after all, and bullish investors tend to rely on storytelling and rampant speculation to backstop their call instead of traditional fundamental analysis. The fact that it’s a play on a high-tech megatrend via the global transition to electric vehicles is the icing on the cake.
However, with returns of more than 2,500% since its 2010 IPO — more than 12 times the returns of the S&P 500 index SPX, -0.29% in the same period — it’s obvious that Tesla is far more than just a fad.
This stock is the real deal, and it’s foolish to insist otherwise.
Sure, there are periods where the stock has declined in the short term. Equally, Tesla has given many traders whiplash lately as the stock has skyrocketed 160% from its mid-2019 lows, so it’s natural to wonder if that move has been a bit too much to be sustainable. And with a goofy CEO who sells flamethrowers to raise funds for his “hobby” of drilling massive tunnels underground, there are sure to be embarrassing headlines that weigh on the stock for legitimate reasons.
Read: Elon Musk says his ‘NSFW’ dance was just an effort to gain Pornhub followers
But investors scared of sticking with Tesla simply because it doesn’t play by the typical rules of Wall Street stocks are missing the point. Here’s what the bears need to understand about Tesla after its recent red-hot run, and why they may want to think twice before betting against the stock.
Tesla’s China opportunity isn’t overblown
The company’s big news lately is about its China expansion, and it’s tempting to write off the hysterical headlines as the latest pie-in-the-sky predictions about the firm’s growth potential. But before you shrug them off completely, consider this: In fiscal 2018, General Motors GM, -1.23% sold 3.6 million vehicles in China and just under 3.5 million in North America. Or better yet, take Daimler DAI, -0.50%, which sold 677,000 Mercedes-Benz vehicles in Greater China in 2018 vs. less than its 330,000 luxury cars sold in the U.S. over the same period.
You can’t just wave a magic wand and sell cars in China, of course. But this is a company that has spent every moment of the last 10 years figuring out how to build up operations including factories, supply chains and a distribution network in America. The lessons learned from this experience will surely set Tesla up for success in this new market.
Bears should think of it this way: even if Tesla’s U.S. sales flatline from here — something that is nigh impossible given current growth rates — the company may still double its sales over the next few years simply by tapping in to Greater China. That tells you all you need to know about why the stock has been on a tear lately.
Musk’s five-year-old forecast is right on schedule
Some bears like to naysay Tesla based on some rather public production delays. But despite those who warned Tesla wouldn’t actually deliver on its long-hyped promise of a mass-market Model 3, this lower-priced model accounted for a staggering two-thirds of U.S. electric vehicle sales in the second quarter of 2019. In the third quarter, Tesla delivered nearly 80,000 of the vehicles to make the Model 3 its leading product by volume now and for the forseeable future.
But more important than simply delivering on the promise of the Model 3 is that the car is one more proof point in the impressive long-term narrative of Tesla’s growth — which, by the way, is right on schedule. Consider that in 2015, despite a slew of production delays, CEO Elon Musk stuck to his goal of 500,000 units sold by 2020 — 10 times the tally of about 50,000 that year. It was a figure that many investors scoffed at but now appears to be a pretty fair forecast five years down the road as quarterly run rates are now around 100,000 total units and growing.
There will surely be future delays and setbacks. But before you roll your eyes over recent comments about how Elon Musk’s planned Model Y crossover could eclipse even the Model 3 in sales, think about how Tesla delivered on these previous and equally ambitious forecasts.
Watch this video: Here’s why the cheapest Tesla will probably cost you at least $40,000
Old price targets are just that … old
One common refrain among the bears is that the consensus price target is well behind the actual share price of Tesla; right now, the media target is $340 — nearly 30% below present levels. But it’s important to understand price targets are created at a moment in time, and a fast-moving stock like Tesla requires constant re-evaluation.
Case in point: In 2020, we’ve already seen three major changes in Tesla targets by my tally. On Jan 2., Canaccord Genuity reiterated its buy call and boosted its target from $375 to $515 for a roughly 37% boost. Then on Jan. 7, Argus increased its target to $556 from $396 — a jump of 40%. On the same day, Credit Suisse upped its target by 70%, from $200 to $340, although it still kept its underweight recommendation.
The price targets on Tesla are moving higher, sometimes dramatically so. That means the consensus price target is steadily moving higher, too. So don’t read too much into someone’s $300 target from nine months ago, since it may soon be revised significantly higher.
Read: Why a ‘battle-weary’ Tesla enthusiast is now telling investors to move to the sidelines
Market capitalization is irrelevant
For the life of me, I don’t know why investors make such a big deal about market-cap comparisons between Tesla and legacy automakers like Ford Motor Co. F, -0.11%. How is this a relevant metric that says anything about where either stock is headed?
Raw size simply doesn’t matter — and even in the context of measuring valuation, market cap has serious shortcomings.
For instance, automaker Ferrari RACE, +0.82% is valued at $29 billion but ships a mere 2,500 vehicles a quarter. Yet there’s no hand-wringing over how Ferrari is a fad company that can’t sustain its value on such thin sales volume, or that it is simply a first-mover on sports cars that is sure to be disrupted by competitors. That’s presumably because investors understand Ferrari is a fundamentally different stock. It’s time the bears realized the same thing about Tesla.
Shorting is for suckers
Perhaps the biggest reason of all to rethink a bearish position on Tesla is that it is simply a money-losing proposition. I’m not talking on missing out on share appreciation either, but rather the bloodbath constantly caused by short-sellers taking a position against Tesla — and getting squeezed out in painful fashion.
Consider that at the end of May, short interest in Tesla peaked at just shy of 44 million shares according to Nasdaq data. But by mid-December, that figure had plummeted to just over 27 million shares.
Sure, Tesla has high enough volume to cover some of this action with the regular froth that characterizes a volatile stock. But it’s important to remember that the “float” of Tesla isn’t as large as you might presume give its 180 million total shares outstanding. Roughly 21% of the company held by insiders — and the bulk of that is in the hands of CEO Elon Musk, who has said publicly on numerous occasions that he has no interest in selling. Throw in institutional ownership of 58% on top of that and you have a steady foundation for the stock underneath the day-to-day volatility.
Occasionally, a well-timed or lucky trade makes a short seller a handy profit in Tesla. But in the long run, bears not only lose their shirts but also prove the bull case for this stock in a big way via another epic short squeeze.
Jeff Reeves is a MarketWatch columnist. He owns no Tesla shares.
