Disclaimer: This post contains references to products from one or more of our advertisers. We may receive compensation (at no cost to you) when you click on links to those products. Read our Disclaimer Policy for more information.
Tesla was three days away from bankruptcy in 2008 and just one month from going under as recent as 2019.
Today, Wall Street’s most controversial stock is the 8th largest company in the world by market cap.
But should you invest in Tesla? Here’s what you need to know.
Tesla Stock Investment Potential
Tesla masters the art of storytelling. The company convinces its users and investors that they are pioneers of energy innovation that will change the world.
Stocks that rapidly rise on narrative trading become difficult to evaluate. Few are tougher to accurately price than Tesla stock.
Tesla’s historic run in 2020 can be summarized by famous investor John Maynard Keynes’ “Castle-in-the-Air” theory, which describes a stock that captures the imagination of the masses because they believe it to represent the next big thing.
This means that investors aren’t concerned with Tesla’s fundamentals today, but only what they will become if it delivers on its promises.
Few stocks can achieve this status on Wall Street, but the ones that do are in for quite the ride.
Tesla stock is incredibly volatile because the company is so difficult to price, similar to another popular asset that’s not anchored to fundamentals: Bitcoin.
Some investors are trading on what they believe the stock to be worth today, and others are trading on what they believe it will be worth 10-20 years from now (or just FOMO buying). The latter are confident Tesla will deliver on its lofty promises.
These ambitions are to accelerate the world’s transition to sustainable energy by engineering electric vehicles, in addition to developing infinitely scalable clean energy generation and storage, among many, many other things.
Tesla currently holds 80% of the U.S. EV market and 18% of the global EV market. Tesla investors are counting on the company to dominate the EV market once the auto industry makes the inevitable shift to fully electric.
Of the 75 million vehicles sold last year, just 2 million were electric. In the coming years, Tesla bulls expect these numbers to flip as the largest cost components of EVs (battery pack systems) decrease with new technology.
This will make EVs significantly more affordable than their gas-powered counterparts on a like-for-like basis.
In addition to having better performance and prices, Tesla may even drive themselves. The company has been boasting about “Full Self-Driving” for years now but recently made its FSD Level 2 Beta available for “anyone that wants it.” Note that Elon Musk has been saying FSD is “two years away” since 2015.
The possibility of autonomous vehicles sent this stock soaring and created a “Transportation-as-a-Service” market.
Imagine having your Tesla drop you off at work, and while you’re at the office, it is driving around doing pick-ups and drop-off for others as a service, getting you paid and acting as a robo taxi on your behalf.
This makes you wonder about the future of car ownership. Is owning a car necessary if there’s an affordable fleet of robo taxis on a 24/7 patrol?
Tesla could also disrupt the insurance industry by providing more accurate policies to its drivers. In theory, Tesla’s data collection on its customer’s driving speed, braking, and road or weather conditions could generate a unique “driver score” and offer insurance policies based on a host of metrics.
Tesla is also trying to roll out an autonomous platoon of electric semi-trucks to disrupt the trucking industry.
According to the U.S. Census Bureau, truck driving is the most common job in 29 out of the 50 United States and generates over $700 billion every year.
But Tesla’s gaze extends beyond the U.S. – its China sales doubled in 2020 and accounted for 21% of the company’s total sales.
Tesla’s third Gigafactory in Shanghai began producing Model 3s in 2019 and plans to produce 500,000 vehicles annually for Chinese consumers.
While the Shanghai-made Model 3 quickly became China’s best-selling electric vehicle shortly after its launch, Chinese regulatory agencies are concerned about several problems with the cars, including “abnormal acceleration” and “battery fires.”
Remember, competition in this market is fierce. Several Chinese EV companies are vying for market share, including Nio, Xpeng, and Li Auto.
However, Tesla isn’t just a car company; it’s an energy company. We believe that it will have to disrupt the energy industry with its battery technology for Tesla to reach its full potential.
The cars generate buzz and build brand awareness, but Tesla’s energy generation and storage technology can change the world.
For example, Tesla is plugging a secret mega-battery into the same Texas power grid that faltered in February’s freeze. This marked Tesla’s first major move into the heart of the U.S. energy economy.
As you can see, there’s an endless number of factors that are trying to be priced into the stock – time will tell which ones come to fruition.
Related: Best FinTech Stocks
Tesla Stock Moat
A company’s “moat” typically refers to its competitive advantage over other businesses in its sector, which allows it to protect its market share and profitability.
Tesla’s most notorious moat is its founder and CEO Elon Musk. Simply put, no other car maker or energy company has Elon Musk as its CEO. For many, a bet on Tesla is a bet on Elon.
Famous investor Ray Dalio describes standout leaders, like Elon, as “shapers” or someone who comes up with unique and valuable visions and builds them out beautifully, typically over others’ doubts and opposition.
Elon is the founder or co-founder of multiple companies: PayPal, Tesla, SpaceX, SolarCity, The Boring Company, Hyperloop, and Neuralink. Many are waiting for SpaceX, or its potential spinoff Starlink, to go public sometime soon.
However, virtually all of Elon’s wealth is tied up in Tesla stock, so if the company fails, he will too.
While some criticize Musk’s controversial decisions as the company’s face, others appreciate him having real skin in the game and leading from the ground floor (often in the factory).
The belief in Elon strengthens the company’s following, similar to Steve Jobs and Apple back in the day.
Tesla’s loyal customer base serves as its advertisers by signifying a unique combination of wealth and concern for the environment.
Driving a Tesla means you’re rich enough to afford a $100,000 car, and you care about the future of the planet. What other car manufacturer can do this for their customers?
The last moat we’ll identify for Tesla is its massive pool of data that it’s been collecting for nearly two decades.
Artificial Intelligence (AI) experts agree that those with the largest data pool will win the AI race, which is a great sign for Tesla.
The company has been able to iterate on its products for years and improve after each update. While Tesla’s been sharpening its sword since 2003, other car makers don’t even have an EV for sale yet.
Related: Best Sports Betting Stocks
Tesla Stock Analysis
Another thing to consider before buying Tesla stock is its recent earnings report. Let’s look at Tesla’s last earnings call in January 2021, it’s first since its inclusion in the S&P 500:
- Q4 2020 Adjusted Earnings Per Share: 80 cents vs $1.03 expected
- Q4 2020 Revenues: $10.74 billion vs. $10.4 billion expected
- Delivered 499,550 vehicles in 2020, up 36% on the year
- 2020 growth rate was the slowest for annual vehicle deliveries since FY 2017 and the second-slowest growth in six years, likely caused by mandated factory shutdowns due to the pandemic
- Q4 2020 vehicle deliveries up 63.1% year-over-year
- Expects annual average delivery growth of 50% going forward
- 6th straight profitable quarter
- New factories to come online in Austin, Texas and Berlin, Germany
- FSD will be available on a subscription basis
- Deliveries of the updated version of the Model S begin in February
Musk added, “the stock market undervalues how good FSD is going to be.” He believes that Tesla’s robotaxi technology (that’s still in development) helps justify its gigantic valuation.
Side Note: Tesla bought $1.5 billion worth of bitcoin in February 2021 and announced it would start accepting cryptocurrency as a payment method for its products. It’s hard to know the exact price that Tesla bought it at, but prices in early February were around $33,000.
This means that as of this writing, Tesla is up roughly $1.2 billion on its crypto trade, which is more than the company has ever made selling cars.
Don’t Miss: Is Bitcoin a Good Investment?
Tesla Bear Case
It’s important to consider both sides of the argument before buying a stock, so let’s explore some of the bear cases for Tesla stock.
First and foremost, Tesla failing to grow into its valuation is its biggest bear case. Tesla accounts for less than 1% of the global auto market in terms of value. Yet, the stock is worth multiples more than any other automaker.
To justify its valuation today, investors are valuing every car that Tesla built at more than $700,000. Even more ridiculous is the sticker price to rationalize its run-up last year: $1.4 million per car.
Another Tesla bear case is its less efficient supply chain compared to the likes of Ford, Toyota, and GM. Tesla bears believe that once these legacy names devote more attention to EVs, their long-established supply chains will overshadow Tesla’s capabilities.
However, Tesla has made several key acquisitions to increase its manufacturing efficiency and capacity, including Germany’s Grohmann Engineering GmbH and Perbix Machine Co.
The next issue for Tesla stock is mining lithium for its car batteries, which oddly enough is really bad for the environment.
Extracting lithium requires enormous amounts of water in developing countries that have limited access to water, possibly resulting in droughts or famine if mining operations become unchecked.
Last but certainly not least are the unfortunate fatalities and accidents involving Tesla’s. We recognize the dangers of driving, regardless of gas-powered or EV, but there’s something different about software overrides and self-igniting.
While we believe autonomous vehicles will make driving exponentially safer and more efficient in the long-term, the infrequent yet heartbreaking deaths along the way will remain tragic.
Tesla was the most shorted stock on Wall Street for some time because of these bear cases. However, Tesla short-sellers lost billions in 2020 and caused some hedge funds to implode.
Moral of the story: short Tesla at your own risk.
Downtown Josh Brown described the Tesla situation with nuance, saying that two things can be possible simultaneously.
Elon Musk has changed the world as one of the greatest innovators of our lifetime, and Tesla can remain a leader in the space forever. But it can also be true that the stock is not a buy.
Related: Should I Buy Amazon Stock?
Tesla doesn’t spend a dollar on advertising. In fact, Elon Musk despises advertising: “Tesla does not advertise or pay for endorsements. Instead, we use that money to make the product great.”
On the other hand, Tesla’s competitors in the traditional auto industry spend a fortune on advertising and endorsements. Let’s look at some of Tesla’s biggest competitors:
- Nio (NIO)
- Volkswagen (OTC:VWAGY)
- Ford (F)
- Li Auto (LI)
- General Motors (GM)
- BYD Company (OTC:BYDD.F)
Here are some other EV-related startups gunning for a piece of Tesla’s market share:
- Workhorse Group (WKHS)
- Canoo Holdings (CNOO)
- Lordstown Motors (RIDE)
- Chargepoint Holdings (CHPT)
- Lithium Americas Corp. (LAC)
- Churchill Capital IV Corp (CCIV)
This market is still very young – remember that EVs accounted for less than 3% of all vehicles sold last year. This industry will be a bloodbath in the coming years.
Related: ARK ETFs
Tesla Stock Allocation in Your Portfolio
The right amount of Tesla stock in your portfolio depends on your investing goals, time horizon, and risk appetite. This mix of factors will vary greatly from person to person.
We do not recommend having too much exposure to any individual stock, especially one as volatile as Tesla.
Investors looking for more narrow exposure to tech, while maintaining some level of diversification may consider the Nasdaq-100 index fund (QQQ).
Learn More: How to Invest $1000
How to Research Tesla Stock
The Motley Fool was recommending Tesla back in 2012 when it was trading on a split-adjusted price of $6. If you had teamed up with the Motley Fool back then, you’d be 11,969% on Tesla today.
The Motley Fool’s machine of analysts and contributors will help you navigate the markets during bull and bear periods.
You can’t afford to miss out on the companies that Motley Fool is recommending for 2021.
Learn More: Motley Fool Review
How to Buy Tesla Stock
Buying Tesla stock is simple – here’s what you need to do:
#1. Open an Account with a Broker
#2. Fund Your Account
Funding your account on Vanguard or Charles Schwab will require your bank’s account and routing number. Once connected, simply deposit the amount of funds you wish to buy Tesla stock.
#3. Buy Tesla Stock
Search for the ticker “TSLA” and enter the amount of shares you want to buy. There are different types of buy orders, but the “market order” will execute immediately (or something like that) after you place the buy order.
Note that trading platforms like Robinhood allow you to buy fractional shares of Tesla, meaning that you can invest as little as $1 in the energy company.
Related: Best Stock Trading Platforms
Bottom Line: Should I Buy Tesla Stock?
Tesla stock surged 695% in 2020 and became Wall Street’s most controversial stock. It doesn’t trade on fundamentals; it trades on narrative.
Tesla’s stock price getting cut in half is as believable as it doubling over the next decade. Bet on either side of the coin at your own risk.
More Investing Resources:
- Best Cybersecurity Stocks
- Best Cloud Computing Stocks
- Upcoming IPOs
- FAAMG Stocks
- Best Biotech ETFs
- Best Blockchain ETFs
- Wall Street Journal Review
- Barron’s Magazine Review
Sean Graytok owns shares of Tesla, Inc.