Despite Tesla (TSLA -0.52%) stock soaring nearly 800% over the past year, one analyst thinks shares have a significant runway for further growth. Shares could rise to $780, the analyst said in a note to investors this week. This translates to an impressive 31% gain from the stock's Thursday closing price of about $593.
Does this analyst's bullish view make sense? Let's take a closer look.
The path to a 30% gain
Goldman Sachs analyst Mark Delaney boosted his price target for Tesla stock by 71% this week, raising it from $455 to $780. The targeted price implies Tesla could soon be worth more than $700 billion. What's behind his thesis?
First, Delaney thinks that electric vehicles may become mainstream sooner than he originally anticipated. Specifically, he thinks electric vehicles could account for 18% of new car sales globally by 2030 and 29% of new sales by 2035. And what are the drivers for this mass-market adoption? Declining battery prices and the rollout of new electric-vehicle models, he predicts.
Broader-market adoption will translate to a rising tide that lifts all boats for automakers bringing to market compelling electric vehicles, Delaney believes. As the world's leading electric-vehicle manufacturer, however, Tesla is well-positioned.
In addition, Delaney expects further expansion in Tesla's operating margin. The company has impressively achieved an operating margin of 6.3% for the trailing-12-month period, largely putting to rest concerns about the company's ability to turn a profit. Going forward, however, the automaker has said it expects this key metric to improve.
"We expect our operating margin will continue to grow over time, ultimately reaching industry-leading levels with capacity expansion and localization plans under way," Tesla said in its third-quarter shareholder letter.
Delaney believes Tesla's ongoing efforts to vertically integrate its operations will help the company reduce costs and ultimately improve its operating margin. To this end, Tesla's management is focusing on vertically integrating battery manufacturing over the next 10 years -- and the company expects this to lead to substantial savings.
In addition, Delaney believes a sales-mix shift toward Model Y (a vehicle that's slightly higher priced than the company's Model 3) and high-margin vehicle software sales will help boost Tesla's operating margin.
While Delaney brings up some promising points about Tesla's prospects, investors should keep in mind the growth stock's pricey valuation. With a market capitalization of $560 billion today despite generating just $28 billion in trailing-12-month revenue and $1.8 billion in free cash flow over the same period, Tesla's shares are priced for near perfection.
The market has arguably already priced in both rapid revenue growth and margin expansion for years to come. Could Tesla outperform even these high expectations?
It's possible. But investors should take Delaney's buy rating on the stock with a grain of salt. The story is exciting, but the valuation leaves little room for error.