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Shares of electric car maker Tesla (Nasdaq: TSLA) have been all over the place recently. The stock fell around 25% from September to October and is still trading 15% below its 52-week high.
Despite this turmoil the stock is still up 100% over the past year and more than 600% since the start of 2013.
So why are some experts making public calls that Tesla stock is about to double again?
Billionaire Ron Baron, the hedge fund manager behind the Baron Capital Group, indicated in his fund’s most recent quarterly report that he is a “fan” of both Tesla and its CEO Elon Musk, and is investing accordingly.
He argues that the company is doing it right, focusing on quality rather than quantity, which he believes is building a foundation for long-term success. He also argues that the company commands a significant “first-mover” advantage as the undisputed leader in the market for electric vehicles.
Since Baron expects the electric vehicle category to grow rapidly, he expects Tesla’s long-term prospects to be very strong.
Today the stock trades at around $246 per share. The company is finally profitable but, without a year of earnings, we can’t compare its valuation to that of other stocks based on a price-to-earnings (P/E) basis. We can, however, compare it to other stocks and the broader markets based on its price-to-next-year’s-earnings (forward P/E) basis.
Tesla is trading at a forward P/E of just under 69. Compare that to the forward P/E ratios for several major market indices and you’ll quickly see why many investors believe Tesla stock is very expensive.
- The tech-heavy Nasdaq 100 trades at a forward P/E of 19.85
- Even the small-cap heavy Russell 2000 trades at a forward P/E of 19.32
- The S&P 500 trades at a forward P/E of 17.05
Earlier this month James Albertine of Stifel Nicolaus predicted that Tesla will rise to above $400 per share, nearly double its price when he made the prediction.
One of the metrics that makes Tesla so attractive to Albertine is the company’s gross margin. With margins already sitting at around 28%, he is encouraged by Tesla’s plan to introduce a few new features that will make an already $110,000 vehicle sell for even more money.
Albertine also noted that Tesla’s large investments in the future are bringing down the short-term outlook for its earnings and profitability.
Another analyst, Steve Grasso of Stuart Frankel & Co., noted that Tesla’s gross margins went from “17% to 25% to 28%,” while pointing out that General Motors (NYSE: GM) and Ford (NYSE: F) have gross margins around 18%.
With this kind of positive trend in margins, he argues that TSLA has a lot of room to run higher.
Baron, meanwhile, likes the prospects for Tesla’s future. “All of us will likely be Tesla customers in 25 years,” he argues.
I have written in the past about how Tesla’s future is about more than cars, with its “gigafactory” expected to produce more battery packs than the number of cars it produces when it comes online in 2020.
Personally, I have a lot of trouble getting behind a stock that has risen more than 600% in the last two years and has a valuation based primarily on its future prospects. Fluctuations in demand, delays in production or in the construction of the gigafactory are just some of the things that can go wrong.
Those are the primary reasons why I sold the stock in July. Though TSLA has risen nearly 12% since then, I still feel comfortable with my decision to sell.
That said, you certainly can’t ignore the opinions of a billionaire hedge fund manager with a great track record and the other analysts who think Tesla stock is about to double again.
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