I believe Tesla Motors Inc. (Nasdaq: TSLA) stock will double within the next 12 months.
Bold? You bet. I know it’s not a popular opinion. In fact, I’d go so far as to say that the disdain for TSLA’s bull run is only surpassed by the herd’s disdain for the overall bull market itself.
For every quarter since at least Q1/2013, any sign of strength by this company has been met with jeers from some pretty powerful detractors.
[ad#Google Adsense 336×280-IA]From the headquarters of GM to the front page of the MIT Technology Review, the chorus has been pretty consistent: Tesla is a hopelessly inflated stock, a flash in the pan and nothing more.
Nonsense…
This company is on track to see a stock explosion that will make its surge back in the spring of 2013 look like a speed bump.
I want you to know today that I believe we are on the cusp of a few key developments that will make electric cars in general and Tesla in particular the wave of the future.
Let me explain why….
The X-Factor for Tesla
You hardly ever see this recognized in the mainstream media, but Tesla has one irreplaceable asset that also happens to be its greatest advantage over its competitors. The company has been blessed with the most innovative CEO on the planet: Elon Musk.
Creativity as a thinker who can’t be boxed in by entrenched competitors, the ability to cheerfully put tens of millions of his own money behind his vision when necessary, a solid grasp of what technology means for the industry he operates in… all of these are great qualities in a CEO. Any company, big or small, is lucky to have a chief executive with just two of them. Tesla has all three in Elon Musk.
He’s a visionary who can afford to be a visionary. We saw proof of this in April 2013, when Musk guaranteed a buyback value for his electric cars, which he pledged to honor with his own money should Tesla be unable to.
His main goal in doing this was to make the cars an even safer investment for potential buyers, softening the $69,000 price tag with a buyback value personally guaranteed by a billionaire. But there’s more to it than that.
It’s no secret Tesla’s been on a great run so far. Sales were up 55% in 2013, as the company sold 10,000 more Model S cars than it did in 2012. Revenue was also great: just over $2 billion for the calendar year of 2013, five times greater than that of 2012. But the naysayers argue that the company was about to hit a brick wall: demand. The universe of customers who would shell out $70,000 for a car, even an environmentally friendly one, was always very limited, they argue. The demand for Tesla’s 70k cars would eventually fall, and fall hard.
And you know what? They’re absolutely right. They know it. I know it. Elon Musk knows it, too.
That’s why he’s attacking his car’s production costs. And unlike conventional automakers who flail about, he knows exactly where to focus. Almost half of the production cost for the Model S comes from the costs associated with its batteries. Solve the battery problem, and you solve the cost problem, making a $35,000 Model S an inevitability.
The idea of that terrifies Detroit, and should thrill the hearts of Tesla stock investors everywhere.
A $35,000 Model S means a spike in demand like nothing the company has ever seen, making the 2013 surge look like a warm-up. Tesla will already be producing 1,000 cars a week by the end of 2014, so it’s well-positioned to capitalize on any such boom immediately.
Two Quiet Coups That Will Spike TSLA’s Share Price
Of course, all of this is just theoretical until Tesla solves its battery challenge. But there have been two key developments in recent weeks that are final confirmations to me that they’re doing exactly that.
The first is the announcement by BMW last month that it will open up patents related to battery cell technology that it developed with Samsung. BMW was just following up on Tesla’s announcement that it would share its own technology with competitors who use it in good faith. That’s not entirely based on altruism, by the way. Musk understands that the market for electric cars right now isn’t a zero-sum game; by collaborating on technology, these companies can reach breakthroughs and enjoy new highs together. It’s what true leaders do instead of hoarding their knowledge.
The second is even more significant. The announced plans for what Tesla is calling a Gigafactory mean that the company is pouring resources into slashing battery costs like never before. This 10 million square-foot factory will have a price tag of $5 billion… hefty, you might say, for a company whose earnings were less than half that in 2013.
But the juice is worth the squeeze. That’s because the Gigafactory will be a pioneer in mass production of cost-effective and high-quality battery packs that will give Tesla an even deeper competitive edge over its competitors going forward. It’s going to be the largest lithium ion battery manufacturing plant in the world.
Understand, that doesn’t just slash costs of production for Tesla… which in and of itself would be a home run for the stock. It also gives Tesla a beachhead in a market it’s only had a foothold in before. There’s only a $4.4 billion market for lithium batteries right now, but that’s expected to almost quintuple to $21.3 billion by 2020. The fact that Tesla is getting in now in such a big way is huge.
Of course, this is a couple of years down the road – the Gigafactory won’t be complete until 2017. But as soon as a location is set in stone, you can expect a very significant stock bump right then and there. It will be a powerful signal that this company is closing in on its paramount objective that will send its stock to high heavens: a $35,000 Model S.
I expect them to announce a location within a few months: Five states are jockeying for the honor already. California, in particular, is seeing bipartisan support in its state legislature for an incentive package that would waive some anti-business laws in California just to entice Tesla to place the Gigafactory in the Golden State.
An Increasingly Rosy Short-Term Outlook
In the meantime, there’s the steady trickle of both good and great news that pushes Tesla’s stock higher today and precedes events that will push it higher in the near future. As I mentioned, the company is accelerating its production of cars, and it’s reaching out into foreign markets like never before as it sets up scores of battery-charging stations that make its product feasible.
Tesla’s “supercharger” stations that already dot America’s mainland are taking root in Europe… in a big way. All of Germany has just recently been “covered” by Tesla, meaning that there’s no area in the country that is more than 320 kilometers away from the nearest supercharger station. By the end of 2014, all of the Netherlands, Luxembourg, Switzerland, Belgium, Austria, and Denmark will be fully covered. England, Wales, and Sweden will be at 90%.
So TSLA investors who are waiting for the Gigafactory to drive up share prices can also enjoy the stock surges that will come from ever-increasing international sales. That, combined with Tesla’s collaboration with other companies’ battery technology, makes me bullish on both the stock’s near-term growth (100% gains) and its long-term potential (stratospheric).
Your Tesla Stock Profit Plan
The only real obstacle to getting in on Tesla now is the company’s stock price. Currently trading at around $260 a share, many potential investors might look at this picture and wonder “Do I buy 100 shares of this? Or make a down payment on a house?”
That’s why I’m recommending a non-traditional move to profit from the coming Tesla stock boom.
LEAPS (Long Term Equity AnticiPation Securities) are a strategy that allows you to control blocks of 100 shares of a company at a cost that’s just a fraction of what it would be to buy them outright.
The beauty of LEAPS is that these buys don’t expire for anywhere from nine months to two and a half years, meaning that investors who are in this for the long run will have plenty of time to see their predictions born out.
Now, the price of LEAPS is determined in part by the volatility of a stock. Tesla scores well above average in the volatility department, so while the price of a LEAPS will vary day-to-day and you can expect to pay a premium, just remember… this IS Tesla we’re talking about.
According to YahooFinance.com, the January 2016 $260 calls last traded for $51.00. That means you can effectively control 100 shares of Tesla for $5,100, a $20,900 “discount” to buying the same number of shares outright.
Now obviously options are a world all to themselves, so you’ll want to get your hands on the Characteristics and Risks of Standardized Options from the CBOE and your broker’s approval before you pony up, to make sure you understand exactly what it is you need to trade them.
But that’s a minor drawback if you believe a company is truly going somewhere.
Like I do.
— Keith Fitz-Gerald
[ad#IPM-article]
Source: Money Morning