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Recent volatility hasn’t changed the dynamics of a great growth business
Thursday 18 Mar 2021 Author: Steven Frazer

Shares in Tesla put in a storming recovery rally last week, getting back to almost $700 after investors had a February to forget. Since 8 March the stock has ripped 23% higher, adding more than $125 billion to the electric car maker’s market value. That’s the equivalent of mining group BHP’s (BHP) market cap, the UK’s most valuable company.

Over the past week (at time of writing) it was the most bought stock on the AJ Bell Youinvest  platform, beating so-called meme stocks like GameStop and Argo Blockchain (ARB) and significantly more popular than any FTSE 100 stock.

The bounce was a reaction to the sharp sell-off that had mauled all growth stocks in recent weeks as investors mulled the possible impact of inflation on future corporate cash flows. But those willing to look past the market’s capricious mood will find that nothing has really changed for Tesla.

The short-term valuation is still eye-popping. The company is trading on nearly 14-times the $48 billion-odd revenue expected for 2021 and a price to earnings multiple of 155 that makes the metric almost meaningless. Investors that have previously viewed Tesla’s investment credentials through a negative lens are unlikely to have changed their view in recent weeks.

Yet Tesla optimists will rightly say that Tesla’s rapid growth trajectory demands a pricey valuation. For example, the company believes deliveries will increase from about 500,000 last year to more than 750,000 in 2021, driving revenue growth of 50% this year, and more than 30% higher in 2022 (to an estimated $63 billion).

Electric car adoption may be slow going right now but it will gather pace as price, range anxiety and other frequent objections put forward by consumers are worked out. This should mean hitting a popularity tipping point when most new vehicle buyers will want electric, and that’s presumably when Tesla will be able to really leverage its huge technological and time advantage.

Then there’s the battery and energy storage opportunity (including Tesla’s Powerwall battery for domestic settings, for example) that Elon Musk (and many analysts) believe may end up being Tesla’s biggest markets, with revenue that eclipses those of its cars. This is an opportunity that is often overlooked by retail investors.

Judging the company or its valuation on a 12 or 24-month view is missing the point. It’s the next decade or two that matter, and Shares believes that investors willing to take that longer-term view will be massively rewarded in time. While Tesla stock is certainly not cheap at this level, this could be a good time for investors willing to hold shares for years to initiate a small position in this growth stock.

AJ Bell referenced in this article is the owner and publisher of Shares magazine. The author (Steven Frazer) and editor (Tom Sieber) own shares in AJ Bell.

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