Shares of electric-car maker Tesla (TSLA -3.55%) have been surging higher recently. Indeed, the stock has doubled year to date. Over the last 30 days alone, shares have risen 43%. You'd think with such an incredible gain behind it that the stock could cool off soon. But one analyst seems to think the stock could trade much higher 12 months from now.
In a note to investors on Friday morning, Wedbush analyst Daniel Ives reiterated a buy rating on the stock and increased his 12-month price target for shares to $300. Even more, he added the stock to the firm's "Best Ideas List."
Here's what has the analyst so bullish on automaker's shares.
The path to $300
Applauding Tesla's recent win with General Motors (GM -0.05%) to share its supercharging network with the larger automaker, Ives said the deal highlights the value in Tesla's overall electric vehicle ecosystem.
Specifically, General Motors said that its vehicles will get access to Tesla's supercharger network starting this year. Though its vehicle fleet will initially have to use adapters. Starting in 2025, however, new EVs from GM will be built with an inlet design that fits Tesla's charging connectors directly.
This agreement mirrors a similar announcement about a partnership between Ford and Tesla a few weeks ago, in which Ford electric vehicles will also get access to Tesla's Supercharger network.
Ives used the new partnership between GM and Tesla as an opportunity to boost his 12-month price target for the stock from $215 to $300. The analyst thinks that announcements like this will encourage investors to approach Tesla stock with a sum-of-the-parts valuation model, assigning greater value to Tesla's businesses beyond its electric car sales, such as energy storage, its charging network, and Tesla's autonomous driving product development.
A frothy valuation prices in near-perfect execution
While Tesla's recent arrangements with major automakers Ford and GM do highlight how electric vehicles are becoming mainstream and represent good reasons to be more bullish on Tesla as the market leader in fully electric vehicles, investors should still carefully consider the risks to investing in a stock after such a huge run-up.
For instance, Tesla stock now has a price-to-earnings ratio of 68. This means the market has priced in very robust earnings growth for the company over the long haul. This is, of course, a fair expectation; Tesla's deliveries are surging, rising 36% year over year in the company's most recent quarter. But recent financial results have also highlighted risks. Operating income during this period, for instance, fell 24% year over year. The metric came under pressure as Tesla slashed prices to fend off a potential slowdown in demand due to higher interest rates. If prices have to come down further for Tesla to keep up its high sales growth rates, the rapid growth in profits that investors expect may not materialize to the degree the market is currently pricing into the stock.
Further, there's a risk that automakers like Ford and GM start gaining meaningful market share on Tesla. Historically, the automotive industry has been extremely competitive. Betting on Tesla stock at this valuation is a bet that things are different this time. While Tesla may very well maintain its competitive lead in fully electric vehicles, there's a risk that this lead erodes faster than anticipated.
