Shares of Tesla (NASDAQ:TSLA) have been surging again. After skyrocketing to an all-time high of about $969 earlier this year, the electric-car maker's stock cratered along with the broader market during the coronavirus sell-off. Shares fell to around $360. But the stock has been rebounding viciously since mid-March. Shares recently crossed $700, giving the company a $131 billion market capitalization.
Many investors who didn't scoop up shares of the electric-car maker during the recent dip are probably wondering whether it's too late to buy shares. Is Tesla stock a buy, sell, or hold today?
These are still early days for Tesla
It's no surprise that many investors are interested in this growth stock. Not only is the electric-car maker's business growing rapidly, but the automaker has also barely tapped into the global massive automobile market.
Consider Tesla's extraordinary growth recently. In 2019, vehicle deliveries soared 50% year over year to about 368,000. And this growth isn't out of the ordinary for the company. Indeed, highlighting just how staggering this growth was, it was on top of 138% year-over-year growth in vehicle deliveries in 2018. More importantly, these rapidly increasing annual vehicle deliveries are translating into soaring gross profit and improving cash flows. For instance, the automaker's gross profit in 2019 topped $4 billion -- up from $2.2 billion in 2017 and $924 million in 2015. Meanwhile, free cash flow improved from negative $2.2 billion in 2015 to approximately positive $1 billion in 2019.
While some investors may reason that Tesla can't keep up this sharp growth, it's important to keep in mind that annual auto sales across major global markets in 2019 were about 90 million. Tesla, therefore, has only scratched the surface of its massive addressable market. In fact, its market share is so small that new competition would likely have more of a positive impact on helping increase awareness of the feasibility of electric vehicles than it would negatively affect Tesla by stealing sales.
Buy, hold, or sell?
Given Tesla's strong growth and the significant runway ahead, it's no surprise that shares are trading at a wild valuation. But investors should still give a nod to just how much future growth is already priced into the automaker's stock. Assuming Tesla can eventually command the same 5% net margin that BMW boasts today, the electric-car maker's total annual revenue will have to more than quadruple over the next five years in order for its net income to begin approaching $5 billion. Yet it's uncanny growth like this that is priced into the company's $131 billion market cap today. Further, even this rosy model to justify the stock's valuation today assumes the electric-car is still growing rapidly by the time it quadruples its top line.
On the other hand, with the Model Y coming to market ahead of schedule, the Cybertruck on the horizon for a late 2021 launch, and Tesla's energy storage business seeing exponential growth, it wouldn't be surprising to see the automaker's top and bottom lines march toward these lofty figures. Still, given the great uncertainty in such optimistic forecasts stretched so far out into the future, as well as the unknown detours that could disrupt the automaker's production or sales growth, it's probably wise to wait for a better entry point into the stock.
Risks to owning Tesla stock are particularly high today because of the uncertainties surrounding COVID-19 and its impact on the economy. Indeed, Tesla's California factory isn't even producing cars right now; Tesla's vehicle production remains on pause as part of a broader effort to help curb the spread of the coronavirus. Investors, therefore, should look for Tesla shares to fall below $700 before considering buying into this growth opportunity. In other words, Tesla shares look like a "hold" at this level.
Even if shares fall below $700, investors who want to buy shares of the stock should tread carefully. The best approach to buying into the automaker's growth story may be to only buy a small amount of Tesla stock initially and add to the position as the company executes in the coming years, or if shares fall to a level where they appear to be meaningfully undervalued.