Tesla's (NASDAQ 🙂 stock is on fire today. After rebounding strongly into a broad market recovery since March, they have gained another 40% in the last 10 days. That upsurge makes investors wonder: How much higher can they go?
Before discussing the extent of this tech darling's relentless upward trajectory, it's important to understand what drives it. Tesla & # 39; s latest rally began after S&P Jones Indices announced on November 16 that the electric car maker will be added to the Index.
Following the move, money managers and investors who closely monitor the S&P will now have to buy the stocks to accurately reflect the world's most followed index. Analysts at Goldman Sachs say the electric carmaker's planned inclusion in the index on Dec. 21 could result in $ 8 billion in demand from active US large-cap mutual funds. In a Bloomberg report the analyst wrote:
"Of the 189 large-cap core funds in our universe, 157 funds managing approximately $ 500 billion in assets under management as of September 30 did not own a Tesla."
Assuming those funds chose to keep the automaker at benchmark weight, they would have to buy $ 8 billion of the stock, or about 2% of Tesla & # 39; s market value, the analysts said.
Tesla shares were up 3.35% on Wednesday, closing at $ 574. After the pandemic, Tesla was the best-performing largecap stock in the US this year, up about 586%, amid growing optimism that the Palo Alto-based company will dominate the electric vehicle market.
Tesla 1 Year Pass.
The spectacular stock rally helped co-founder Elon Musk add $ 100.3 billion to his net worth this year and catch up with Bill Gates to become the second richest person in the world. Behind this strength lies very strong earnings reports from the past year, showing that Musk is now able to sell cars at a profit, and that his technology is far superior to other entrants to the electric vehicle market.
Last month, Tesla reported a fifth consecutive profit, which easily exceeded analyst estimates. This increase in profit was accompanied by production and delivery records and an unprecedented high free cash flow. These achievements came at a time when other automakers were struggling amid the global downturn caused by the COVID-19 pandemic.
More Than A Car-Maker
Another The appeal of Tesla & # 39; s highly volatile stock to long-term investors is the belief of some analysts that the automaker has more value then showed the current valuations of the stock. Morgan Stanley changed its bearish stance on Tesla this month, predicting that the company will also make money by selling high-margin software and services.
"To value Tesla on auto sales alone, ignore the many companies embedded within the company," analyst Adam Jonas wrote in a note as he upgraded the stock to "overweight" and raised his price target by 50% to $ 540
Jonas & # 39; valuation now includes Tesla & # 39; s network services, energy storage and insurance activities. The possibility of the Internet of cars is also real and a prerequisite for unlocking further gains for the stock, the analyst wrote.
According to some of the most optimistic analysts, Tesla & # 39; s rally has much more room to run. Dan Ives, director of equity research and analyst at Wedbush Securities, is betting that the stock could reach as much as $ 1,000 in his "bull case" scenario.
Rising demand for electric vehicles in China will play a major role in this scenario, as the world's second-largest economy drives companies like Tesla to create new energy vehicles that will account for 15% or more of the market by 2025 , said Ives.
Bottom Line
Tesla is experiencing an unprecedented boom following the incorporation of S&P and the company's impressive earnings reports in recent quarters. With Tesla & # 39; s valuation at extreme levels, there is little room for the company to disappoint in terms of production or demand forecasts the market is expecting. Investors must be careful.