Peering Ahead One Year (TSLA)

Today, Deutsche Bank raised the price target for Tesla Motors (TSLA) from $160 to $200, maintaining a BUY rating.

In a nice demonstration of a self-fulfilling prophesy, TSLA is up $13 or about 8% at the announcement to $179.

Let’s look forward, into the next year.  Tesla will likely go up to $200, and probably exceed it for a while. But then there are compelling reasons why it will likely stop.  As lovely as this unending upward run has been, its important to understand why some people think the stock will go back down.   Eventually, TSLA should turn into a long-term, modest growth stock as the company matures.  There might be another huge growth spurt in 4-5 years if the GenIII (a planned, affordable sedan) succeeds, but that’s a post for another day.

The Model S sedan is the only product Tesla Motors currently has in production
…besides California renewable energy credits.

Here’s 3 reasons while it will still grow:

  1. Tesla’s got Momentum – Tesla is a momentum stock.  Meaning that its going up…because its going up and not due to fundamentals.  People see the stock rising, and hop on for the ride, kicking up the stock as they go.  Simply stated, Tesla is popular.  I’d say its the new Apple, but then I would have to slap myself.
  2. Elon Musk is the bastard child of Ironman and Captain Kirk – He’s going where no man’s gone before and he’s doing it with undeniable style.  He hasn’t sold a dime of the stock (just the opposite, he’s added to his position).  And, most importantly with momentum stocks, investors trust him.  He has earned his chops in entrepreneurship, and he under promises and over delivers consistently.
  3. Tesla’s a friggin great company – Its got a great car a compelling mission and is making a nice profit.  Simple.

And here’s why it could retreat modestly over the next year:

  1. The Economy – Even though the Fed chickened out like France in a World War just now, it will have to start laying down the law eventually.  Once the bonds and other savings accounts become more attractive (higher interest rates means higher returns), lots of folks will gladly pull their money from the volatile stock market and put it in safer investments.  The whole stock market will go down, and probably Tesla too.
  2. Tesla doesn’t make 13 million cars a year – Its worth $20 Billion right now which is completely absurd.  It’s valued at a third or a half of GM and Ford.  To make that market cap a reality, Tesla would need to make millions of cars it does not make.  No question, Tesla is overvalued right now.
  3. No more Short Squeezes –  while there is still a ton of shorts in the solar market, most of the ones in Tesla have been squeezed out in two major short squeezes (first quarterly profit, and a second, surprise profit).  The huge jumps that Tesla made last year won’t be happening again.
  4. Everyone makes mistakes – While Tesla has done an admirable job at avoiding lots of hurdles, it will make one, or several, mistakes eventually.  And the price for doing so will be higher than most other firms.  One example of the kind of hit Tesla could take is the unfavorable NY Times review of the Model S’s mileage last year, which tanked the stock double digits over just a few days.  Tesla recovered with a solid Q2 performance, but its important, as an investor, not to let that blind you to inevitable human error.  Or incompetence.

I bought Tesla for the long haul.  Though I did cash out a bit of my investment already to ensure my gains, I still have a huge portion of my portfolio dedicated to it.  Why?  Because though I think Tesla might come down from the high soon, I think it will continue to grow steadily thereafter.  Over a 10-20 year horizon, it will dwarf its current profits.  There is no question that if Tesla continues as it has, it will become one of the best car companies in the world.  So if you’re in it for the next year, show some discipline.  If you’re in it for the decade…act now or forever hold your peace.

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