Shares of Tesla (NASDAQ:TSLA) have been surging in recent weeks. But one analyst thinks the stock will go even higher over the next year. Goldman Sachs analyst Mark Delaney just increased his 12-month price target for the stock from $905 to $1,125. 

While a $1,125 price target may only represent 8% upside from where the stock was trading on Wednesday, it would still be a notable achievement. After all, just six months ago, shares were trading at around $600. And just one month ago, the stock was trading at about $800.

Analysts' growing bullishness for the stock suggests the shares' recent climb higher may be more than hype. After all, a growing number of analysts have good reasons to believe that Tesla's lead in the fast-growing electric-vehicle (EV) space could widen in the coming years, despite incumbents' comparably slow expansion into EVs.

Here's a look at why Delaney is more confident in Tesla's potential. More importantly, we'll explore whether there's substance to the stock's recent surge higher.

Model 3 interior.

Model 3. Image source: Tesla.

Robust demand and big expansion plans

Delaney's price-target upgrade on Wednesday boils down to his expectation for strong demand relative to supply, even as the company invests aggressively in expanding its manufacturing capacity. Hertz's recent announcement that it was ordering 100,000 Tesla vehicles by the end of next year, Delaney explained, is just one example of material ways the company looks poised to sustain a strong demand trajectory. Further, Delaney says Tesla is poised to benefit from margin expansion over time as the company's order volume increases.

The analyst is right that Tesla is investing heavily in expanding its production capacity. The automaker expects to bring online two new factories this year -- one in Berlin and one in Texas. In addition, Tesla is still ramping-up production capacity at its factory in Shanghai and believes there's room for further production-capacity improvement at its factory in Fremont, California.

What about Tesla stock's wild valuation?

While it's difficult to argue with Tesla's business success, there are some good reasons to believe that shares may be overvalued. After all, the company's sky-high price-to-earnings ratio of about 335 suggests that too much hype may be priced into the growth stock.

But Tesla has spent a decade outdoing expectations. And its recent sales surge, as other automakers struggle to deal with supply-chain shortages, implies that the company may be both widening its lead in electric-vehicle technology and even vying for the crown for the world's most efficient and capable automobile manufacturer.

Getting more specific regarding how Tesla's business fundamentals have a shot at living up to the stock's pricey valuation, consider the rates of Tesla's current revenue and operating margin trajectories. Tesla's third-quarter revenue surged 57% year over year, and its operating margin expanded from 9.2% in the year-ago period to 14.6%.

Further, Tesla believes it can grow its vehicle deliveries at a rate of about 50% annually over a multiyear time horizon as its operating margin moves toward record-setting levels for its industry. The company's top-line and margin momentum are a recipe for soaring earnings.

Sure, investors may not want to pile into the stock at this level. But they also shouldn't be quick to sell such a great company that seems so early in its growth story. There may still be significant upside left for Tesla stock. Nevertheless, investors would be wise to view the stock as a hold (and not a buy) after such a huge run-up and given the near perfection that's baked into the stock.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.