With the stock market pulling back sharply over the last few trading sessions, investors would probably expect a high beta technology stock like Tesla (NASDAQ:TSLA) to be down significantly as well. That’s surprisingly not the case, as the electric vehicle company has been showing serious relative strength amidst market weakness. This could be a sign that Tesla is gearing up for an end-of-year rally, particularly when you consider the fact that the stock has been stuck in neutral for the majority of 2021.
Although Tesla’s current valuation might raise some eyebrows among investors who are keen on fundamental analysis, the company’s unique brand and market-leading status in the EV industry still make it one of the most intriguing companies today. According to MarketBeat, there are even analysts out there bold enough to slap a $1200 price target on the stock, which implies the potential for massive upside.
The truth is that Tesla might be one of the best stocks to consider buying in the S&P 500 at this time, and here are a few reasons why:
It’s a Disruptive Business in Growing Markets
Sometimes, it pays to keep things simple when it comes to investing. We know how many governments and businesses are focusing on clean energy sources as an alternative to fossil fuels, and this trend is only going to gain momentum in the coming years. For example, consider the Biden Administration’s $7.5 billion plan to expand electric vehicle charging to underserved areas. That’s a huge reason why Tesla could deliver strong outperformance over the long term, as it’s a company that is disrupting both the automotive and power generation industries with cutting-edge clean energy technology.
The global EV market is expected to reach an estimated $725 billion by 2026 and international markets like China and Europe are seeing huge demand for these vehicles. Tesla is well-positioned to expand internationally into these high-growth markets thanks to a gigafactory in Shanghai and a planned gigafactory in Berlin. Tesla is also investing heavily in R&D to reduce its manufacturing costs and improve its technology, which could at some point allow for the mass adoption of electric vehicles. Sustainable power generation products like solar panels, solar roofs, and batteries are an underrated aspect of Tesla’s business as well, especially with the global renewable power generation market excepted to grow at a CAGR of 7.9% from 2020 to 2027.
The Premier Luxury EV Brand
Tesla has come a long way from a scrappy startup to a renowned luxury automaker with 3 of the top 5 selling electric vehicles in the United States as of Q2 2021. A lot of this has to do with the company’s brand, which is another strong reason to consider adding shares. Sure, there are other automakers getting into the EV business and trying to capture market share from Tesla, but it’s difficult to replicate intangible assets like a strong brand name. Early investors have certainly been rewarded for buying into the vision of the company’s charismatic CEO Elon Musk, and it’s fair to say that the Tesla brand is stronger than ever at this time.
One of the biggest catalysts that have helped with the company’s brand development has been Tesla's consistent technological innovation. For example, Tesla’s vehicles feature a best-in-class battery range and the ability to handle drivetrain updates with a simple Wi-Fi or cellular device connection. The company’s vast network of superchargers can provide a full battery charge in under an hour. Also, luxury car buyers are often interested in exclusivity and speed, and the Tesla Model S Plaid can do 0-60 miles per hour in under 2 seconds, making it one of the fastest production cars in the world and delivering those qualities in spades. These are all unique innovations that have helped Tesla develop its brand, and it's hard to envision another competitor stealing the luxury EV crown anytime soon.
Steadily Improving Earnings
Finally, investors should be very optimistic about Tesla’s recent earnings history, as the company has been steadily improving its financial results. Tesla achieved an industry-leading 6.3% operating margin in FY 2020 along with a 2020 EPS increase of 7,367% year-over-year. These results were all the more impressive given that many automakers struggled to deal with the impacts of the pandemic. It’s clear that the company is heading in the right direction in terms of earnings growth, and in 2021 the trend has continued thus far.
Tesla exceeded $1 billion of GAAP net income in Q2 for the first time in the company’s history. The company also reported a 97% year-over-year increase in Q2 revenue and saw considerable growth in vehicle deliveries, which is worth noting given the global semiconductor shortage. The bottom line here is that if Tesla can continue delivering earnings growth, reducing operating costs, and producing further innovation, the sky is the limit for shareholders.