Tesla Stock: A High Risk Bet Or An Attractive Investment?

Tesla, Inc. (NASDAQ:TSLA) stock has returned over 10x in the last 5 years. However, steep valuations and weak fundamentals make Tesla stock a high-risk bet today.

Tesla Stock - A Bet Or An Investment
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Elon Musk, founder and CEO of Tesla Inc (NASDAQ:TSLA) created a flutter on Social media last week. And, what exactly did the charismatic leader have to say? Musk announced that Tesla will unveil its semi-truck on Oct 26th in Hawthorne, California. Following the disclosure, investors have cheered the stock higher. Tesla stock is up by over $13, a gain of 3.7% in the last 2 trading sessions, reflective of the optimism Musk's announcement has created among Tesla stock investors. The important question is: Can Tesla stock march to new all-time highs?

Tesla Stock: A Bet On The Future

At the last closing price of $379.8 a share, Tesla was worth $63.4 billion (market cap). Tesla stock has returned over 10x in the last 5 years, a timeframe which has seen the Nasdaq Composite (INDEX:COMPX) double. To put it another way, Tesla stock has been the kind of investment most investors dream of.

Tesla stock price chart

These returns came on a small base and given the current valuation of Tesla stock, it will be hard to repeat. What's more interesting is the fact that these returns have come over a period which has seen Tesla report a profit in only 2 quarters, out of the total 20 reported quarters.

Tesla Net Income chart

Well, it's easy to say that earnings aren't the right way to evaluate Tesla stock. Well, how about cash flows? The company hasn't fared any better on this front either. Tesla cash flows have spiraled lower with each passing quarter with the trailing twelve months (TTM) free cash flow coming in at -$3.15 billion in the latest quarter. And, all of this while the company's debt has been on a steep upward curve, coming in at $7.94 billion in the latest quarter, up from less than $1 billion 5 years ago.

Tesla debt and free cash flow chart

To put it another way, Tesla fundamentals have been deteriorating steadily through the years and yet the stock has given mind-boggling returns. So, what exactly is driving Tesla stock? Well, Tesla stock is a bet on the future. A future with electric cars and clean (solar) energy at the center of it. In light of this, news which significantly alters the future of Tesla will have a larger impact on the stock price rather than the fundamentals. Elon Musk's recent revelation has investors excited and we are not surprised. Here is why.

Will Semi-Trucks Drive Tesla Stock Higher?

If the recent market reaction is anything to by, the semi-trucks segment could lift Tesla stock price higher. But, how high exactly? A hard question to answer, but one we probably have an answer to. According to recent commentary from Morgan Stanley analysts Ravi Shankar and Adam Jonas, Tesla could be the biggest catalyst in the trucking industry in many decades. However, it wouldn't be worth a lot of money, especially when you consider the kind of valuations Tesla already commands. As reported by Barron's, the Morgan Stanley analysts believe that the semi-trucks business could be worth $5.1 billion to Tesla, which equates to just a little over 8% of the current market capitalization of the company. Based on these numbers, Tesla stock should ideally gain by a similar margin and trade closer to $395 (8% from the Sep 13 close), assuming Tesla wasn't overvalued to start off with, which in itself is a huge point of contention between the Tesla bulls and the bears.

Playing Tesla Stock From Here.

Given its history, it's unlikely that Tesla stock rally will stop at just 8%. While the fundamentals are nothing to write home about, shorting Tesla wouldn't be a smart ploy either. The stock has defied conventional wisdom for the better part of the last decade, and it won't be surprising if it continues to do so. As the popular adage goes, "The market can remain irrational longer than you can remain solvent." Hence, shorting Tesla stock isn't a smart way to play the stock. Having said that, a pullback in Tesla stock price cannot be ruled out altogether. The Tesla stock technical chart is currently flashing an RSI (Relative Strength Index) reading of 71.01, which implies that the stock is now in the overbought territory. Hence, a pullback might well be on the cards.

To sum up, given the steep valuations and weak fundamentals, we wouldn't bet our money on this counter. While Tesla stock is a bet on the future, we prefer making investments.

Looking for fundamentally strong technology stocks? Check out Amigobulls' top stock picks from the tech sector, which has beaten the NASDAQ by nearly 157%. Interested in automotive stock? Then, we also have our top picks from the auto sector, which have beaten the S&P 500 by over 254%. If you're a trader though, you should check out our daily trading ideas section for daily, free updates on the latest crossovers and other popular technical signals.


Virendra Singh Chauhan Virendra Singh Chauhan   on Amigobulls :

Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice.

Buying and selling of securities carries the risk of monetary losses.Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions.

Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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