Why I'm Bullish on Tesla

David Fessler | Energy and Infrastructure Strategist | The Oxford Club

Last week, my good friend and colleague Alexander Green wrote an article titled "Why I'm Bearish on Tesla."

I feel as though I have to respond with a counterargument.

I originally recommended Tesla (Nasdaq: TSLA) to my subscribers back in 2013 when it was trading for just $8 per share (split-adjusted).

I wish I'd followed my own advice back then and picked up 1,000 shares. They'd be worth around $852,000 today.

Hindsight is a wonderful thing.

Alex correctly pointed out that Tesla shares jumped more than 700% in 2020. And this year, they're already up almost 20%.

That gives the company a market capitalization of more than $800 billion. And by any measure, this car company looks extremely overvalued.

But to value Tesla properly, we need to consider all of its business units.

Superhuman EV Maker

First, let's briefly give Tesla and its CEO, Elon Musk, credit where credit is due. What Tesla's EV segment has accomplished in just the last two years is superhuman by any measure.

Tesla is a bright star in an otherwise lackluster car market. 2019 and 2020 were terrible years for U.S. auto sales.

2019 sales were down 177,839 units from 2018's. And 2020 sales were down a whopping 2.59 million units from 2019's.

But Tesla's sales increased.

It sold 367,500 cars in 2019. That was 17,500 more than it sold in 2018.

And in 2020, in the midst of a raging pandemic, Tesla sold 499,550 vehicles. That's 132,050 more than it sold in 2019, an increase of 35.9%.

That's impressive... and an indication of how in-demand its vehicles are.

Alex argued that competition in the EV sector is coming. And he's absolutely right. Competitors in the EV business are popping up like weeds in a summer garden.

But no car company is making the same volume of EVs as Tesla is. Take Ford (NYSE: F) for instance.

It introduced its Mustang Mach-E all-electric sports car with much fanfare. But last week, it said it was delaying hundreds of the new model to perform "additional quality checks."

Some buyers were told they would have to wait at least another month. Ford delivered only a handful of Mach-Es during 2020.

Making a few EVs is easy. Making them at the scale Tesla does is much more difficult.

Not Tesla's Only Hustle

If Tesla's only business were selling beautiful EVs, I might feel differently. But EVs aren't Tesla's only hustle.

Alex did not mention Tesla's residential solar or energy storage businesses. In a few years, they are going to dwarf Tesla's EV sales.

Tesla introduced its solar roofing tiles a few years ago. But the initial design made installation difficult.

It has since redesigned the product and slashed its price. Now installation is much simpler and uses fewer parts.

As a result, Tesla's new Solar Roof V3 is not much more expensive than conventional solar plus new roof shingles.

Solar shipments in the third quarter of 2020 jumped 111% from shipments in the previous quarter. This is particularly noteworthy because solar installations overall dropped 25% in 2020 due to the pandemic.

To meet this increase in demand, Tesla is ramping up production at its Buffalo, New York, Gigafactory. It's partnering with local solar installers on the product.

And let's not forget Tesla's energy storage business. Back in 2019, Elon Musk said he believed the company's energy storage business could grow to "roughly the same size" as its car business.

It's well on its way to achieving that. During the third quarter of 2020, energy storage battery shipments totaled 759 megawatt-hours.

That's an 81% jump over the previous quarter's. And Tesla's energy business is going to continue to ramp higher from here.

I'm not the only one who thinks Tesla is going to be much larger than it is today. Billionaire investor Ron Baron thinks Tesla will easily become a $2 trillion company. That's nearly three times its current valuation.

And so far, Baron's big bet on Tesla is paying off big-time. His investment firm, Baron Capital, purchased more than 7.3 million shares of Tesla.

At the time, he expected Tesla to return 20 times his initial investment. His split-adjusted buy price was $43.07. So he's almost there. And he's not selling any of his shares.

Alex certainly has a point when it comes to the valuation of just Tesla's EV business. But he totally missed Tesla's bigger picture.

Tesla is a sustainable energy company. It has not one but three growth engines driving it.

Because of this, I think Tesla is an easy double or triple from here. If you're a long-term thinker and want to invest in sustainable energy, Tesla is still a great way to play it.

Good investing,

Dave

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