Should I buy and hold Tesla stock?

Tesla stock at $ 500: buy, sell or hold?

Tesla stock recently hit new highs and is currently above $ 500. The reason was that the automaker will soon be included in the S&P 500 index. As a result, many investors are likely to dig deeper into the stock. Some investors who have missed the meteoric rise in the past twelve months may wonder if it's too late to get started. And those who are already at it will deal with the sale.

Even if you can never be sure how a stock will perform over the long term, investors should check whether the valuation makes sense or not. So let's take a look at the latest business momentum and the valuation versus the outlook.

2020: year of expansion

A quick look back at Tesla's 2020 momentum explains why investors pounced on the stock. Deliveries in the last twelve months are up 24% year-on-year, although factories were idle earlier this year due to Corona.

After that, however, growth accelerated. In the third quarter, deliveries were up 54% year-on-year. This is primarily due to an increase in production of the Model Y launched in March.

Tesla has expanded aggressively this year, including the Model Y earlier than expected. In addition, new production lines have been set up in new factories.

The automaker ended 2019 with the capacity to manufacture 640,000 vehicles annually. Since then, Tesla has not only created the production facilities for an additional 200,000 vehicles annually, but has also started building completely new production lines in Shanghai, Berlin and Texas.

Unsurprisingly, analysts estimate that Tesla's revenue will grow 46% over the next year.

Meanwhile, 2020 was also the year Tesla went from losses to significant gains. The automaker generated $ 1.4 billion in free cash flow in the third quarter of 2020 alone.

The price for perfection?

While Tesla's growth story is certainly impressive, there is likely to be a lot of optimism in its $ 500 valuation. For example, even if Tesla grew its revenue an average of 30% annually for the next five years and had a net profit margin of 7% on that revenue, Tesla would have net income of $ 7 billion annually. This is quite a small amount. Even when compared to the automaker's market cap today of nearly $ 500 billion.

But there are two factors that make Tesla stock a potential buy, even now. First: If fully electric cars become mainstream in the future, then Tesla will probably be at the forefront of a huge addressable market. Not only could sales growth exceed 30% annually, but the high growth rates could also be sustained for over a decade.

Second, if Tesla releases software updates that make its vehicle fleet fully autonomous - which is set to happen soon - then the company could build one of the most valuable software businesses in the world.

CEO Elon Musk has said he believes the value of its autonomous software could exceed $ 100,000 per vehicle. Even if customers aren't likely to pay $ 100,000 for vehicle software, the company could transition to the subscription model and build a strong recurring revenue stream. Not only could this accelerate Tesla's revenue growth. It could also bring the company the profit margins of mature tech companies.

Buy, sell or hold?

In short, Tesla stock could prove to be worthwhile even now. Even if the implementation envisaged by Tesla and continuous market share gains are far from guaranteed. So I would like a better entry point into Tesla stock - maybe somewhere under $ 450. On the other hand, the great potential of software means that opting out now could turn out to be a mistake.

So: buy, sell or hold? If you're willing to endure volatility and take the risk of this stock, even for $ 500, it's no bad thing. However, other investors should rather wait for the next slump.

The post Tesla stock at $ 500: buy, sell or hold? appeared first on The Motley Fool Germany.

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The Motley Fool owns shares of and recommends Tesla. Daniel Sparks has no position in any of the stocks mentioned. This article was published on November 21, 2020 on and has been translated for our German readers.

Motley Fool Germany 2020

Photo: Tesla