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TSLA Stock Is a Buy – Why I Invested in Tesla on the Dip

Tesla Motors (TSLA) has been on a wild ride lately. TSLA stock has fallen about 35% from its high of $194.50 to around $130.

TSLA stock teslaOf course, even after this decline, shares of TSLA stock still are up about four-fold year-to-date in 2013.

So is Tesla stock doomed for continued declines, or is the electric car manufacturer now a great opportunity for new investors now that it has cooled off a bit?

Me, I am a believer TSLA stock, its flagship Model S sedan and its iconic CEO Elon Musk.

That’s why I personally bought into Tesla on this pullback — and I think you should too if you’re a long-term investor.

Here’s why I invested in TSLA stock:

TSLA Negativity Is Overdone

The reasons for Tesla’s rollback aren’t really anything dramatic.

Sure, there have been reports of Tesla Model S sedans catching fire after crashes. But this isn’t a recall issue due to shoddy manufacturing. It’s just damaged TSLA vehicles, and only a handful at that.

Furthermore, the auto industry has long known the risk of fire is greater for any plug-in or hybrid using lithium ion batteries — General Motors (GM), for instance, issued a special guide to first responders in 2011 to discuss the best way to deal with its Chevrolet Volt electric vehicle.

In other words, three fires involving damaged Tesla vehicles is hardly a sign that the company is cranking out death traps.

Furthermore, Tesla earnings in November that disappointed some investors actually met internal growth targets. The 5,500 vehicles produced in Q3 was in line with targets, but some investors were hoping for figures as high as 7,000 on the quarter.

Exuberance clearly got the better of some analysts last quarter, but that doesn’t mean TSLA isn’t growing at a good clip.

Consider the company has predicted 6,000 Tesla Model S sedans manufactured in the current quarter — another uptick in production. It’s not 7,000, no, but more is more.

Dust Is Settling for Tesla Stock

The reason I entered TSLA stock at around $135 per share recently is because I think the market has overreacted to these bearish news items. Now that the TSLA shorts have finally got the leg down they were banking on and now that the fair-weather swing traders have moved on, it’s a pretty good time to make a long-term bet in Tesla stock.

Here’s why:

TSLA at Support: As Serge Berger noted on InvestorPlace immediately after earnings, Tesla stock had support levels at $130 and $115. Shares have comfortably settled in around the $130 range now that the fireworks have ended, meaning the downside risk is pretty low from a technical perspective.

The Electric Vehicle Revolution Is Real: This isn’t just a Tesla story. Electric vehicles are the way of the future, with the Volt, the Prius plug-in from Toyota (TM) and the Nissan (NSANY) Leaf all racking up more than 10,000 units in sales each this year. Ford (F) isn’t far behind with its electric Fusion and C-Max compact plug-ins. In other words, the EV market is soaring across the board right now; it represents about 4% of the auto market — and is growing fast. With plans for a Tesla Model X SUV and Tesla Model E midsize sedan in the works for 2014, TSLA is not just growing sales of its existing Model S but opening up new product lines for a big footprint in this important part of the auto market.

The Tesla Brand Is Powerful: The reason I think these new vehicle lines will see tremendous success is because TSLA still is a powerful brand with consumers. After all, the Model S got the highest-ever rating for an automobile from Consumer Reports and the government’s highest safety rating. Tesla’s customers are evangelists of the brand, speaking with reverence and wonder of the Model S the same way early adopters of the iPod, iPhone and iPad spoke of Apple in the Steve Jobs era. Sure, no company remains dominant forever … but if you think the Tesla brand will crumble overnight, you haven’t met many Model S drivers. Furthermore, there’s no brand confusion here — Tesla is synonymous with electric vehicles, and to many consumers, it is the only EV they know of.

Tesla’s Growth Is Real: Amid all this talk of new TSLA vehicle lines and Wall Street sentiment, it’s easy to overlook the fundamentals that led to this meteoric rise in Tesla stock. TSLA doubled its revenue from $204 million in 2011 to $413 million in fiscal 2012. This year, revenue will hit $2.3 billion — yes, with a “B” in fiscal 2013. Furthermore, Tesla turned its first quarterly profit in Q1 2013 ahead of schedule and is now operating in the black. But next year, earnings will jump from just a few cents a share to more than $1.40 per share, according to estimates.

Tesla Production Is Booming: And in case you’re worried this growth won’t keep up, remember that Tesla raised more than $300 million in 2013 via a secondary stock offering, and recently entered into China and Europe to sell its Model S sedans. Capacity continues to increase, but a backlog remains. As Musk put it in the company’s recent earnings report, “We’re production constrained, not demand constrained.” And that production continues to expand rapidly to meet that robust demand — meaning investors can expect continued growth in 2014 and beyond.

There still are very real risks to Tesla stock in the short term. The number of TSLA shares held short in mid-November hit the highest level since the end of April, and we’ll have to wait for more recent data to see how many of those bears got washed out. Also, the forward P/E is still almost 100 based on FY2014 earnings forecasts.

But Tesla CEO Elon Musk himself remarked that shares were overvalued before the stock took a tumble, and most analysts that called for caution did so because of valuation concerns — not growth concerns.

Also, consider when Baird downgraded Tesla stock to “neutral” several weeks ago, it was with a price target of $178 — and on fears that “any hiccups in execution” posed a big risk thanks to unrealistic expectations. In other words, it wasn’t that Baird lost faith in TSLA … it just worried that investors weren’t acting rationally.

Sure, another spate of vehicle fires could create bad press. And there still are plenty of naysayers who mock the peculiarities of Tesla’s balance sheet — profits booked from EV credits that it sells competing automakers, for instance, or the way it books leases and records non-GAAP profits as a result.

But while more short-term volatility might be in the cards for TSLA stock, the long-term outlook is bright as this electric vehicle icon continues to redefine how the world things about automobiles.

Plus, there aren’t a whole heck of a lot of growth opportunities in domestic equity right now. TSLA stock is one of the few places where big gains in revenue and profits are a real possibility.

To me, the worst that can happen is that Tesla does stagnate and struggles to find a leg up from here thanks to a big sentiment shift.

But considering the massive long-term potential, that’s a risk I’m willing to take.

More on TSLA Stock

  • For the record, I said I’d buy Tesla a few weeks ago and made good on my word. (The Slant)
  • It’s trial by fire for Tesla stock and its true believers. (Wall Street Journal)
  • One risk worth watching: Has TSLA overlooked the problem of some vampire-like energy sucking from Model S sedans that are already fully charged? (Jalopnik)
  • On Tesla Model S leases, how TSLA books them and how it affects GAAP vs. non-GAAP earnings. (International Business Times)

Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he was long TSLA Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP

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Comments
  • Joe the plumber

    How can a start-up company such as Tesla who builds only EV’s and so few ever can compete with large companies? A person has to be naive to believe it can. The big car makers really have a lot more know-how and resources than Tesla has and that’s why I think Tesla is just a flash in the pan. None the less, I’m amazed how people who invest in Tesla stocks think.

    • marcusthejames

      Blockbuster/Netflix, Taxis/Uber, Yellow Pages/Yelp, etc etc. Established companies have never been safe from disruptive startups.

      • QKodiak

        Blackberry/Apple

  • Fooyoo

    Maybe the NHTSA would be happier, maybe US legislators and bankers would like it better, if the Chinese were the ones to flood the world with A Tesla-like car. That is what they are doing by causing every possible speed bump to Tesla’s absolutely-earned success. Maybe weve been used to having the Japanese talking down at the US car industry for making mediocre cars. Ask any of the three recent, most notorious, Tesla drivers, what they think about their cars. They all love the performance, the safety, the range… they all hoped onto another one as quickly as possible.

  • Fooyoo

    Tesla got a perfect 5/5 safety testin score, period! The rest is a bunch of… The NHTSA needs to address the fact that, with their perfect score being EARNED by Tesla, it must be incredibly difficult for there to be a safety issue. Otherwise, NHTSA, call your self selectively incompetent. “Watch out Tesla here comes the… ” a headline from yesterday that should have ended in “crappy car that got bailed out by the feds, is cosing billions in unpaid tax help, prances around claiming to be electric (when its a gasoline car), etc…”
    Bottom line is, a number of dimestic US manufacturers produce cars, which require gasoline or are hybrids, which have gotten in all sorts of gasoline fires as a result of crashes, and whose technical specs have caused them to be a fire risk. They have been dealt with like disabled children who need our sympathy. After all, we are used to domestic brands offering cheap reliability, cheaper financing, and ads with women in skimpy dresses looking for you to forget about it all. Tesla, for the first time in a long time, is an American car that has achieved the highest overall score, plus a consumer report recommendation, plus the highest safety score… period.

    • QKodiak

      You forgot to mention the fact that Tesla hasn’t spent a penny on advertising. They don’t need to. The car is so good, that it sells itself.

  • Fooyoo

    Consumers are in line for months to get a Tesla all around the world. The fact is, Tesla is the future of the car industry because they are the only ones not married to exhaust fume profits. You can throw as much car smoke on that as youd like, Tesla comes out the other end of that absolutely clean. Too bad some the other guys have to bottom-feed to compete with Tesla’s technology and infrastructure – which no one else even comes close to having. Aside of Tesla, a clean clar means having an overpriced squidget mobile with a pathetic battery range… next in line is making a mess with a gasoline consumer that would like to be electric ( also called a hybrid or plug-in or whatever other misleading term has been thrown around). For that example google the notorius article titled “whatch out Tesla here comes the…”. All Tesla model S owner, regardless of how and where, or against what they drive, seem to love their cars. It must be for a reason. Tesla is a serious American company that has achieved the number one spot for the US. This is the time for the USA to help its most recent super star gain the world market share that consumers are begging for Tesla to provide. Hey, reporters and analysts and bankers and dealer associations and legislators married to gasoline engine companies: there is no turning back, this is America and Tesla is the best, so get out of the way! You cant cheat your way, microscpe pick apart, headline your way out of, the fact that Tesla won every bit of every accolade they have.

  • Buckler Fern
  • QKodiak

    I knew they were going to bounce back; it was just a matter of when.