Daily Gains Letter

Oil Price Drop Signals the End for Tesla Motors?

By for Daily Gains Letter |

Price Oil Drop Signal the End for Tesla MotorsTesla Motors, Inc. (NASDAQ/TSLA) is currently running into a traffic jam on the chart, having declined 27% since trading at $291.42 on September 4. But I see this kind of move in a stock like this as a possible investment opportunity.

Now we are hearing market watchers saying Tesla is dead money as long as oil and gasoline prices stay low. The problem I see with this argument is that it ties the value of Tesla to the direction of oil. While the lower oil prices may hurt Tesla as an investment opportunity, I’m not convinced.

My view is that investors are scrambling out of Tesla prematurely. I look at the situation as more of a valuation issue, given that the stock continues to trade at a high multiple of 73X its estimated 2015 earnings-per-share (EPS) and has a price-to-earnings growth (PEG) ratio of 4.25. The metrics are high, based on the old-school thinking towards valuation, but these are different times, when excess is acceptable.

In my view, Tesla has become more of an icon rather than a play on expensive gasoline. The cars are fantastic and look great. They are not clunkers, but battery-powered vehicles that can bolt out of the gate in 3.2 seconds to 60 miles per hour for the all-wheel drive model in testing. This vehicle also has an incorporated self-driving feature.

The reality is that those who are buying Tesla’s vehicles are not really trying to save a buck or two. The cars go for around $40,000 and up. It’s not really about cutting back on fuel costs; albeit, it does help that the cars can receive free charges with the battery upgrade, so added fuel charges are an afterthought.

Tesla continues to outperform the S&P 500 despite the decline. The stock has advanced 43% over the past 52 weeks, versus a 14.12% move in the index. The stock has moved below its 50-day and 200-day moving averages (MAs), but I see this as more of an investment opportunity, based on my technical analysis.

Tesla Motors Inc Chart

Chart courtesy of www.StockCharts.com

The growth estimates continue to look strong, as the company expands into Australia and tries to get its bearings in the massive auto market in China.

Tesla is estimated to earn $0.60 per diluted share this year, but see superlative growth of $2.89 per diluted share on revenue growth of 64.5% in 2015, according to the Thomson Financial consensus. These are huge growth metrics that could make Tesla an investment opportunity on further price weakness. Tesla has also consistently beaten Wall Street estimates.

The key for Tesla will be its international expansion to drive revenues. In Europe, there are currently 14 charge stations that connect the Netherlands, Germany, Switzerland, and Austria.

Yet the biggest investment opportunity for Tesla is in China, which is struggling with pollution at this time and is a fertile market for Tesla. The company is looking at building its “Model S” cars in China and has established “Supercharger” stations in Beijing and Shanghai.

So while the stock price may move lower toward the $200.00 level, investors may want to keep their eye on this stock, watching for further breaks and considering call options if they’re looking to invest in a stock like Tesla.

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