Why Tesla Motors Inc Stock Is a Buy on a Sell-Off

Tesla (NASDAQ: TSLA  ) stock is down about 17% from its all-time high of $265, which the company reached about a month ago. After such a considerable run-up during the past 12 months, a breather is to be expected. But has this significant pullback provided investors another buying opportunity?

Model S. Image source: Tesla Motors.

The problem with disruptive companies
Companies with the best business models and the most sustainable growth stories will almost always trade at valuations that are difficult to rationalize, especially when iconic visionary CEOs like Elon Musk are at the helm. Heck, Mr. Musk is even Iron Man's friend.

One reason valuations of stocks with monstrous growth opportunities ahead often seem wildly optimistic is because investors typically imagine that a company's future prospects will develop in a linear fashion.

But linear thinking doesn't work for Tesla stock. Tesla's business is set to grow exponentially. And two major catalysts will serve the electric carmaker in the endeavor: a Gigafactory that houses more lithium-ion production than exists in the entire world today, and the first affordable fully electric car ever built with a meaningful range (about 200 miles). 

Growth may look something like this.

Data used in chart is based on a combination of comments from Tesla management, Gigafactory plans, and statements in the company's letters to shareholders.

Very few companies in history have had such incredible opportunity ahead of them.

If you're having trouble understanding how Tesla can deliver such robust figures, here is some follow-up reading.

Is Tesla a buy on the pullback?
Chances are, Tesla won't be trading at bargain levels again for years. Why? It's disruptive pure-plays like Tesla, with leading market positions, that often make the best long-term holdings -- think Apple, Amazon, and Google. So, don't expect to get these core holdings cheap so early in their story.

Given its $27 billion market capitalization (about half of General Motors), Tesla is priced to be disruptive. But with the underlying business, and Tesla's competitive environment suggesting that this expectation is realistic, this stock likely won't be getting any cheap treatment. Even more, very few analysts have given credit to the potential scenario in which Tesla's business growth actually exceeds the market's expectations, and with the help of a Gigafactory, Tesla will be in a position where that extreme outcome is a possibility.

That said, I'd say a pullback offers a great time for investors to pull the trigger on Tesla. Of course, investors should only do so if they've done their own due diligence and have their own confidence in why they bought shares. For growth stocks like Tesla, the ride will likely be volatile, making personal conviction in the underlying business all the more important to help you hold on to the stock over the long haul as Mr. Market serves up offers from one extreme to another.

Further, given the enormous forward-looking assumptions priced into Tesla's stock today, investors who decide the stock is right for their portfolios should buy shares in moderation. While there is plenty of upside opportunity for this stock, there is also a chance Tesla may not live up to the bullish assumptions the market expects from the company. One wise way to buy growth companies with premium valuations is to initiate a very small position, and slowly add to it over time, capitalizing if shares fall.

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Read/Post Comments (11) | Recommend This Article (5)

Comments from our Foolish Readers

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  • Report this Comment On March 26, 2014, at 6:34 PM, Pietrocco wrote:

    You "forget" to mention the huge, guaranteed, share dilution!

    Also, and more importantly, what if Tesla were to sell much less well than your 2020 projections??

    What would then happen to the stock price????

    HUGE risk, tiny potential gain.

  • Report this Comment On March 26, 2014, at 8:06 PM, djtetsu wrote:

    I know people are so poralized on this topic but I haven't heard the bulls really consider any possibilities of delays. Wasn't the Model X originally for 2013?

  • Report this Comment On March 26, 2014, at 8:30 PM, NavyChum wrote:

    Right, Pie. And they also "forgot" to mention the MS is the best car on the road, Tesla has the best engineers in the auto business, and Tesla is going to continue to take lunch money from the established auto companies.

  • Report this Comment On March 26, 2014, at 8:58 PM, TMFDanielSparks wrote:

    @djtetsu,

    That's a good point. And I think you're right: bulls should talk about it more. But for the record, here's my take.

    It doesn't bother me one bit because Model S demand and Tesla's global rollout continues to exceed expectations. Tesla spends zero dollars on advertising and customers are buying up every model s the company makes. Even in the U.S., Tesla is still supply limited. So if Tesla launched the Model X earlier it could not only take some of the energy away from the Model S rollout, but it could also lower demand a bit for Model S in the U.S. as consumers choose between models. I think that it's important Tesla remains supply limited (and not demand limited) with no advertising budget in order to reap scale advantages as much as possible. As long as Tesla keeps exceeding delivery expectations, I don't care what car it is selling to make it happen ;).

  • Report this Comment On March 26, 2014, at 9:55 PM, damilkman wrote:

    I have a question for Dan. In 1999, maybe it was 2000 one of my friends insisted I should invest in Level3. At the time Level3 was trading at 158. This was of course before the 1:16 reverse stock split. At the time Level3 was touted as a can't miss for the same reasons as Telsa today. Despite a saturated telecom market, Level3 had this amazing moat that was going to allow it to dominate the market. Yet it did not happen.

    Level3 along with 99% of the internet bubble failed. They failed despite Dan's ancestors at the TMF pumping them up. Today I see Tesla along with a score of other battery and fuel cell stocks sky rocketing.

    Is history repeating itself? Who do I trust? Dan and his promotion of Tesla or Dan's cohort next to him who writes for fuel cell companies? Like the Internet bubble of old only a couple are going to make investor expectations.

    When I look at the internet bubble I observe too much stock put into short term moats and not enough into a sustainable product. AOL was king for a couple years until broadband made it pointless. Level3 failed because the edge failed to increase exponentially and new technology allowed for old fiber to be reused. Juniper could not make enough money in the ISP business and they had to go enterprise.

    Now I look at TSLA today. I read the posts and despite the different field they say the same things from 15 years ago. The same guarantees of a hundred other companies were made those 15 years ago. About 5 retained their valuations. As a pessimist and one that looks at statistics, what do you see that makes you confident that Tesla will beat that 1 in 20 odds.

    A moat is not good enough. The world is full of innovation as Level3 learned. Having an amazing technology is not good enough. Celera still had not market despite their break through. The moat must be sustainable as AOL learned because the technology field changes on a dime. What does Tesla have that puts it in the same camp as GOOGLE, Amazon, and Apple? Those three companies built a sustainable moat not dependent on innovation changing the game.

    What happens when an innovation which inevitably will come changes the entire field and makes a giga factory irrelevant? You want to bet your retirement on the fact that only Tony Stark can figure things out?

  • Report this Comment On March 26, 2014, at 10:30 PM, AllyTheCat wrote:

    Sparks plugs...what more to say?

  • Report this Comment On March 26, 2014, at 10:53 PM, TMFDanielSparks wrote:

    @damilkman

    To answer your question, there is always risk to investing. And acknowledging the downside risk in a growth stock like Tesla, I advised:

    "investors should only do so if they've done their own due diligence and have their own confidence in why they bought shares. For growth stocks like Tesla, the ride will likely be volatile, making personal conviction in the underlying business all the more important to help you hold on to the stock over the long haul as Mr. Market serves up offers from one extreme to another.

    Further, given the enormous forward-looking assumptions priced into Tesla's stock today, investors who decide the stock is right for their portfolios should buy shares in moderation. While there is plenty of upside opportunity for this stock, there is also a chance Tesla may not live up to the bullish assumptions the market expects from the company. One wise way to buy growth companies with premium valuations is to initiate a very small position, and slowly add to it over time, capitalizing if shares fall."

    Hopefully you did your advisor told you to do your own due diligence and that if you did invest in Level3 you only invested a small portion of your portfolio to more effectively manage risk associated with growth stocks.

    Thanks for your thoughts. You had some great points.

  • Report this Comment On March 27, 2014, at 12:53 AM, haaggus wrote:

    I'm sure the bears have a strong case when it comes to Tesla, but all I will say is that it may prove unwise to bet against Elon Musk and his team of geniuses.

  • Report this Comment On March 27, 2014, at 5:58 AM, Pietrocco wrote:

    Daniel,

    Will you please finally correct your numbers and allow for the future, certain, dilution??

    Not that this is the only "miss" from your article.

    Despite the caveats that you do provide, it`s actually a totally unbalanced analysis: you only focus on what COULD go well, and the associated potential upside, totally neglecting what COULD go wrong! And the share price DEVASTATION that would follow.

    As if we needed another pink-sky Tesla bull...

  • Report this Comment On March 27, 2014, at 9:33 AM, parlormadam wrote:

    I would like to remind everyone on this post - IF YOU ARE SHORT ON TESLA BELOW $205 BEST PLAN OF ACTION WILL BE COVER IT AND EAT THE LOSS.

    Tesla will trade in 205-220 range until April 1st. Once the April comes we are talking about $300 a share. Wait for the announcements due from Mr. Musk end of this month.

    US government is planning to support any renewable energy initiatives with new and novel plans around April

  • Report this Comment On March 27, 2014, at 11:01 AM, txfilmguy wrote:

    Pietrocco: "what if Tesla were to sell much less well than your 2020 projections??

    What would then happen to the stock price????

    HUGE risk, tiny potential gain."

    I suppose a person holding long positions in TSLA might stand something to lose if they don't hit 2020 projections… if said investor had reeeeeaaaaallly slow reflexes. There's plenty to gain on the 4-year horizon. If it looks like it might miss, get out before 6 years is up. There's no rule that says you have to hold your shares for six years.

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