At the moment, Tesla Inc. ranks as one of the most popular stocks among both novice and seasoned investors. But should you be buying Tesla stock?
Considering the massive gains the stock has made shareholders over the past couple of years, it’s no surprise that more and more people are willing to bet on the electric car maker’s prospects.
Tesla’s stock was trading at roughly $400 per share on November 2, 2020 and reached an all-time high of about $880 per share by January 8, 2021, representing a more than 100% gain in just under two months.
While shares have pulled back slightly since then, a number of investors feel that they have missed out on this massive rally. They are faced with the question: “Is Tesla a good stock to buy now?” Before deciding whether or not it’s a good time for investing or buying Tesla stock, here are a couple of factors that investors should consider.
What does Tesla do?
According to renowned investor Warren Buffet, investors should know and understand a business before taking a stake in it. This helps minimize the numerous risks inherent in any investment. Buying Tesla stock is no exception.
In essence, investors should avoid investing in stock without full knowledge of several factors. These include how the company makes money, the services it offers, the countries it operates in, and how the company’s flagship product is selling.
For investors looking into buying Tesla stock, this information is easy to find. But they should be ready to contend with the fact that the company is not just an electric car maker. According to Tesla stock earnings for this year’s second quarter, the company produced and delivered over 200,000 vehicles.
But manufacturing electric cars isn’t the only business that Tesla is involved in. The company is also developing full self-driving (FSD) technology and has made significant investments in developing batteries for its vehicles. Both of these innovations have a substantial impact on its share price.
Company Fundamentals
So, having a clear understanding of what the company does, should you start buying Tesla stock now? Not so fast. You have just scratched the surface in terms of conducting your due diligence on the stock.
The next thing investors need to look into is the company’s fundamentals. You can do this by going through the company’s annual report or 10-K where you can look at its balance sheet, income statement, and cash flow statement. These three core statements are intricately linked and are an essential part of the investment process.
The income statement reveals how the business performed throughout each period, displaying the sales revenue at the very top. The balance sheet shows the company’s assets, liabilities, and shareholders’ equity at a particular point in time. On the other hand, the cash flow statement shows the change in cash in each period as well as the beginning balance and ending balance of cash.
Once you’re familiar with these three financial statements, look at some of the basic financial ratios of the company compared to its past as well as its peers. This should give you an idea as to whether or not the company is fairly valued. Some of the ratios you’ll probably want to know include price-to-earnings (PE), price-to-sales (PS), debt-to-equity, and return on equity.
Right now, Tesla’s PE ratio is 373x compared to an industry average of 195x, implying that investors are paying a premium to own Tesla’s shares.
Upcoming Catalysts
You may be asking yourself, “Is it too late to buy Tesla stock?” or “Is it worth buying Tesla stock now?” After all, the stock’s growth has begun to slow down.
If you are an investor with a more long-term approach, you should be keen on finding out what the company’s catalysts are likely to be. Catalysts are factors or events that drive a stock’s value up or down. For a multifaceted company like Tesla, there are multiple catalysts, both near term and long term, that can propel the stock price to greater heights.
One great example of a near-term catalyst is the opening of the Berlin Gigafactory. Tesla recently announced that it would be opening the Berlin Gigafactory, a move that is expected to shake up the car industry in Germany and Europe as it accelerates the shift towards electric car adoption. According to the company, the plant is expected to start with the production of the Model Y. Once the expansion phase is completed, the factory will produce 500,000 cars per year for the European market.
Two other major catalysts to be on the lookout for include the launch of FSD v9 and President Biden’s electric vehicle rebates. Tesla’s full self-driving version 9 and subscription plan are due to be launched sometime in August. The EV bill proposal includes a 30% tax credit for manufacturers to retool or build new facilities to produce advanced energy technologies such as batteries. In addition, it commits $174 billion for electric vehicles and charging stations, including $100 billion for consumer rebates.
Wall Street’s Opinion
One approach that investors could take to determine whether a particular stock is primed for significant gains going forward, is to consider what the pros or people with a proven track record of success are saying about the stock.
At the moment, more than 30 analysts are covering Tesla’s stock, the majority being relatively bullish and offering varying 12-month price targets. For instance, Mizuho Securities analyst Vijay Rakesh believes that Tesla’s stock has considerable upside potential based on a number of factors. He recently lifted his price target from $820 to $825, implying an upside potential of at least 28%.
Heading into 2022, the Mizuho analyst points out that as production in Austin and Berlin gets into high gear, it could drive further improvements in gross margins. In addition to this, he sees the new 4680 battery as a possible tailwind that could drive the stock price higher.
However, before you buy Tesla shares based on analyst recommendations, it is important to remember that their past performance is not necessarily indicative of future performance. You should only use their guidance to complement your own due diligence. Consider all research findings, avenues, and opinions before buying Tesla stock.
Though Tesla is one of the most well-known stocks on the market, you should do your own research before investing your hard-earned money in the company.
Featured Image: Pixabay
