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Tesla Stock: Is It a Buy?

By Daniel Sparks – Jun 2, 2020 at 3:31PM

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After Elon Musk's SpaceX had a successful launch over the weekend, many investors may be taking a closer look at the visionary businessman's electric-car company.

Following SpaceX's successful launch of U.S. astronauts to the International Space Station over the weekend, interest in the stock of Tesla (TSLA -3.46%) jumped, according to Google Trends. Indeed, the stock even spiked 8% on Monday, a gain that was likely due in part to increased interest following the SpaceX mission.

Whether you're interested in Tesla because of SpaceX's impressive launch, Tesla's soaring share price recently, or the automaker's powerful fully electric cars, this article is for you. Here's a look at the company's recent performance and whether or not shares are attractive at their current level.

A Model S and Model X outside of Tesla's factory in California.

Tesla vehicles outside its California factory. Image source: The Motley Fool.

A growth stock

First of all, investors should understand that Tesla is a growth stock in its purest form. This means sales are surging and that the company's growth opportunity is robust, but it also translates to heightened risk, particularly in the near term. Since the stock's valuation today is based primarily on strong financial results far into the future, speculation is fundamental to the stock's intrinsic value. A slight change in the trajectory of the business today, therefore, can lead to massive changes in the long-term potential of the company and huge swings in the stock price. In short, Tesla investors should expect a bumpy ride.

Huge growth

It only takes reading a few of Tesla's most recent earnings reports to realize that the electric-car maker's business is in high-growth mode.

Fueled by sales growth for its Model 3 (launched in 2017), Tesla's trailing-12-month vehicle deliveries are up 41% year over year. Deliveries of the Model 3 specifically (the automaker's most affordable vehicle) are up 73% over the same period.

More importantly, there's good reason to expect this rapid sales growth to continue in the coming quarters and years.

In the near term, Tesla's deliveries will likely benefit from the recent launch of a made-in-China Model 3 for that country's massive market. Though the new factory didn't come on line until late last year, it already has installed capacity to produce 200,000 Model 3 units per year. And the company is currently installing capacity for Model Y production at the factory. Given that Tesla delivered about 368,000 vehicles in total last year, this factory will likely provide a huge boost to the automaker's sales.

Furthermore, the Model Y, the company's most affordable crossover SUV yet, will likely be more popular than its Model 3 if global sales trends of SUVs relative to sedans are any indication. Tesla just launched the Model Y in Q1, and production is still ramping up. This vehicle will likely be a major catalyst for sales. Notably, the company said in its first-quarter update that the Model Y's gross profit margin was positive during the period, marking the first time in its history that a new product achieved a positive gross margin in its first quarter of availability.

A blue Model Y

The Model Y. Image source: Tesla.

Equally important to Tesla's recent sales growth is the fact that its business model is proving to be scalable. The trailing-12-month net loss was $144 million, compared with a loss of nearly $1 billion in 2018. Free cash flow (cash from operations less capital expenditures) was about $1 billion over the trailing 12 months. This compares to negative free cash flow of $222 million in 2018.

A premium price tag

Despite this exciting momentum, the risk of buying shares at their current price may be too great. Tesla currently has a $165 billion market capitalization despite only generating $1 billion in free cash flow over the trailing 12 months. To help mitigate some of the risk associated with such a frothy valuation, investors may want to look for the stock to fall below $800 before buying.

Of course, there's always a chance that Tesla goes on to exceed investors' high expectations and shares never drop below $800. That's the risk in sitting on the sidelines and hoping for better buying opportunities. But it may be a risk worth taking, since shares have a history of highly volatile trading.

Daniel Sparks has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Tesla. The Motley Fool has a disclosure policy.

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