Going into 2014, my second-largest, real-money holding is Tesla (NASDAQ:TSLA). Though it's tough to guess where the stock will go in the next 12 months, over the long haul I'm placing my bets on a bullish future. I think Tesla's current price levels provide investors a reasonable entry point into a stock with enduring characteristics. In fact, I'd go as far as to say that Tesla is one of 2014's best opportunities.
I haven't always been bullish on Tesla stock. I debated that Tesla was overvalued when it reached levels around $190 per share. In fact I sold shares at about $165. Recently, however, I decided that selling was a mistake. I bought shares in the $130 range when three fires in five weeks drove the price down.
Notably, trading in and out of a stock like this isn't a reflection of my typical buy-and-hold investment style. Instead it simply reflects that fact that I changed my mind regarding my outlook for Tesla stock. The fact that the trades worked out favorably was simply luck.
Though when I sold shares the first time I believed the stock was fairly valued if it could actually sell hundreds of thousands of its alleged more affordable Model E per year by 2016, I also believed this to be the best-case scenario for Tesla. And in any projection, it's important to give weight to the probability of all the potential outcomes -- even the worst-case scenarios. That led me to believe that a bet on Tesla Motors' stock at levels that clearly priced in mass-market adoption of its Model E was purely speculative.
Why Tesla shares look undervalued
So why did I change my mind about Tesla stock? Here are the two arguments most important to my bullish outlook for the stock
Lack of competition: There's clear demand for Tesla-style electric vehicles, and competition has yet to react. When I say Tesla-style, I'm referring to high-performance, long-range, purely electric vehicles.
The value proposition of a fully electric car with meaningful range is far different than the value proposition for a hybrid. Tesla's vehicles, unlike hybrids and ICE vehicles, allow the owner to ditch gas stations forever. It means having a fully charged car, every morning, ready to drive hundreds of miles.
Even more, it's already evident not every manufacturer will be betting heavily on electric vehicles as a future means of sustainable transportation. Toyota and Hyundai, for instance, are placing some of their eggs in the hydrogen fuel cell basket. Many manufacturers are continuing to make big bets on hybrids in their 2014 models as well. No one, however, has launched any vehicle that resembles the combined fully electric range, style, and performance of Tesla's Model S.
Sure, Tesla will inevitably face competition from vehicles with the same value proposition. But, as the only current major pure-play in all electric vehicles, every day without competition is another day for Tesla to get ahead.
No, the future probably doesn't belong entirely to electric cars. On the other hand, it also probably won't belong entirely to hydrogen-fuel-cell vehicles or hybrids. What we do know is that initial demand for Tesla's vehicles suggests that electric cars will inevitably play a meaningful role in the future of transportation. And, unlike its peers, Tesla won't be splitting its efforts across different vehicle technologies. As of today, Tesla is the only major player that looks like it will be focusing purely on electric vehicles. As the automotive industry's only proven and fast-growing pure-play in electric vehicles, Tesla won't be giving up easily to competition as it inevitably surfaces.
Execution: Tesla is executing beyond expectations in many different areas.
In 2013 Tesla exploded onto the scene. The company is on pace to sell 21,500 Model S in 2013 -- up from just 2,650 in 2012.
Its Model S boasts an exhaustive list of impressive accolades, proof that electric cars have the capability to perform exceptionally well.
Even more, Tesla has surprised investors in 2013 with plans for a rapidly expanding Supercharger network that is already under way.
Tesla's global expansion, too, is already looking hot. With plans for deliveries in China in Q1, and having started European deliveries last quarter, Tesla looks poised to have a global presence by the time it introduces its lower-cost car during the planned 2016 to 2017 time frame.
A next decade investment
The absence of meaningful competition and Tesla's rapid expansion give me confidence in the bullish outlook I used to view as a best-case scenario. Annualized combined Model S and Model X deliveries exceeding 50,000 units by 2015 and Model E deliveries to the tune of hundreds of thousands of units per year by 2017 now seems like a reasonable expectation. Not to mention a planned attempt to eventually take on the best-selling vehicle in the U.S. for over three decades with a Tesla truck.
Importantly, however, given the forward-looking valuation the market has given Tesla, investors who buy Tesla stock shouldn't do so with the intention of making a quick buck. The pricey valuation almost guarantees fluctuation and unpredictability in the short term.
Zooming out, however, Tesla is an excellent stock for investors with a Foolishly long-term outlook. Tesla's excellent management, proven execution, and first-mover advantage in a fast-growing market of fully electric cars sets the stage for an investment I can imagine myself holding for decades.
Whether you agree with me that Tesla is an excellent investment or not, it's important to carefully weigh the range of outcomes you see as possible before you decide Tesla is a buy. As a stock that is priced entirely on future expectations, the value of the shares today is almost completely reliant on events that haven't yet unfolded. So a slight difference in expectations can have a dramatic effect on the stock's fair value today.