Updated: Nov 27, 2020
Tesla (TSLA) tested its all-time high last week at $500 a share and given that the stock has risen 1100% from its low or $40 in 2019 is not a reason to sell. To the contrary, it might just be another breakout and a renewed call to be bullish. We have listed 5 compelling reasons for this bullish call and we may expect the stock price to double from when it stands today.
Tesla broke out from a short term consolidation to break above $470 when S&P 500 announced that the company will be included into the index starting the Monday of Dec 21.The stock has been sidelined the past 3 months as the nation was deciding if Trump presidency would continue. Even after the elections and as Biden was gaining more electoral college votes, TSLA remained range bound until the S&P 500 inclusion news.
Here are the 5 reasons why Tesla may be heading higher:
Reason 1 : Inclusion into the S&P 500 itself is a good reason to give Tesla the needed boost to breakout from the trading range. According to a Mckinsey study “What is a stock index membership worth?” indicated stock prices tend to exhibit excess returns over the next 40 to 50 days being included into the index. Given that Tesla will only be added into the index on Dec 21, we can get a chance to buy it in early, despite the stock having run up over the past few days since the announcement. The article did mention that this premium is short lived. Perhaps this small nudge is what is needed to get the momentum traders to get the stock moving in the right direction. I will include the link to this study below. In a recent announcement from Goldman Sachs, the investment bank is estimating an influx of about $8 billions from institutions to replicate the index. That may not seem a lot for $500 B juggernaut but like I stated that this may be the boost that we needed for the breakout.
Reason 2: Democrats favor the green power. To get a more long term drive for Tesla stock to continue with the uptrend momentum, having the Democrats in power will definitely unlock more positive news when Biden gets inaugurated in January. I expect more favorable news from the Dems over the course of next year and the remaining term of his presidency.
Reason 3 : Stock is breaking new highs. Momentum stocks that are breaking new highs tend to go higher over time. Amazon (AMZN) is such an example as shown in this chart below.
However, just price movements may not be a convincing argument. However, to achieve sustainable growth, when a company like Amazon reaches that critical point from turning not just into a profitable enterprise but one that is super profitable, that is when the stock prices will explode upwards.
Tesla might just as well be at the cusp of turning positive with its earnings per shares but analysts are all expecting this EV car company to become very profitable in the coming few quarters.
Reason 4: EV stocks are hot and Tesla has been only lukewarm. EV stocks have been running red hot in the past 6 months especially its Chinese counterpart NIO Inc (NIO) which ran up $5 to $50 in during this period. TSLA being the more popular stocks in the US may just have been outran by NIO. If NIO is just a foresight of what TSLA stock may be doing in the coming few months and especially with the recent breakout, we can expect it to see this stock double or triple.
Tesla ran up almost 1000% here but NIO is up 2700% during the same period.
Reason 5: Price-to-Sale (PS) valuation indicates higher value. For a more fundamental approach to these EV companies, PS valuation ratio may be a good indicator to use as valuation. NIO is current valued at 38 times its sales while Tesla is capped at 18 times. This alone can project a double in price valuation giving TSLA a near term future price of $1000 per share.
There you have it, 5 darn good reasons to buy Tesla while it is still cheap. Well no one can predict the future but you just need to have the odds in your favor.
Disclaimer: Given these arguments, I have recently switched out of all of my NIO holdings into TSLA. By no means, this article should be construed as a recommendation to you as we do not know what your personal investment needs and risk tolerance should be.