Hyper growth electric vehicle company Tesla, Inc. (NASDAQ: TSLA ) has been stuck in neutral for the past 6 months. After running up from $200 to $370 in the first half of 2017, TSLA stock has been bouncing between $300 and $350 ever since.
The trading opportunity looks pretty promising. Buy TSLA stock when it approaches $300 and the relative strength index (RSI) approaches 35. Sell TSLA stock when it approaches $350 and the RSI approaches 65. That has been a sure-fire strategy over the past half-year.
But what about the long-term investment opportunity? Does the emergence of this sideways-bound trading pattern mean TSLA stock is maxed out?
Not really. Tesla stock is just pausing before its next big rally.
What will power that rally? Model 3. I reasonably see Model 3 production and delivery ramp powering TSLA stock to above $450 soon.
Delivery Ramps Power Big Rallies In Tesla Stock
Range-bound behavior is nothing new for TSLA stock. It was range-bound for most of 2015 and 2016. Excluding one big drop in early 2016, which was bought en masse, the stock bounced between $180 and $260 for most of 2015-16.
At that point in time, Model S and Model X delivery numbers were largely unimpressive. Despite big promises of huge ramp to come, investors weren't seeing it in the quarterly numbers. Total vehicle deliveries were running around 10K to 17K per quarter.
But then the third quarter of 2016 happened. TSLA delivered an absurd 24.8K vehicles in the quarter - after just 14.4K deliveries the prior quarter. After that quarter, Model S and Model X production and delivery ramp concerns disappeared. And TSLA stock roared higher - from $200 to $370.
Now, we are stuck in this same range-bound trading pattern prompted by production concerns. TSLA stock is bouncing between $300 and $350, as the stock is turning into a tug-of-war between bulls and bears regarding Model 3 production and delivery ramp.
History sides with bulls on this one.
TSLA figured out production ramp on the Model S - and the Model X. So, it's likely they will figure it out with the Model 3 too. Moreover, Model 3 delivery has already surged from 222 in the third quarter of 2017 to 1.5K in the fourth quarter of 2017.
Once Model 3 production hits its stride and delivery numbers get into that 10K-and-up range, TSLA stock will soar.
How high? I think $450.
Why $450 Makes Sense For TSLA
Despite persistent production and delivery delays, demand for Tesla vehicles has never faded. This was true with the Model S and Model X, is true for the Model 3, and will be true for any subsequent vehicles. This persistent demand, despite huge wait times, speaks to the underlying value of TSLA as more than just a car company. There is brand value there.
Tesla is cool.
Because of this, the company should have no problem growing alongside the secular growth electric vehicle market. Electric vehicle sales growth in the US is actually accelerating, up from 32% in the 2012-16 period to 40% in 2017 . Domestic market growth is usually a good proxy for international market growth, so I think the global EV market experiences growth of roughly 40% per year into the foreseeable future.
TSLA should be able to maintain market share and grow at a similar clip. A 40% growth rate over the next 5 years puts 2022 revenues at $63.25 billion. That seems reasonable, considering Ford Motor Company (NYSE: F ) is at nearly $150 billion in annual revenues.
At that point in time, gross margins should be in excess of management's 25% target. Lets conservatively call it 25%. That should lead to 10% operating margins, given other auto companies have operating margins roughly 10 to 15 percentage points lower than gross margins. A 10% operating margin on $63.25 billion in revenues implies operating profits of $6.3 billion. Take out $500 million for interest expense, 21% for taxes, and divide by (presumably) 180 million diluted shares, and you get to earnings per share of roughly $25.50.
At that point in time, long term revenue growth should slow to about 15%, while margin drivers could pump up long-term earnings growth to 20%. The market trades at price-to-earnings/growth (PEG) ratio of 1.2 , implying a 20% earnings growth stock deserves a 24 forward multiple. A 24 forward multiple on $25.50 in 2022 EPS gets you to a 2021 end price target of $612. Discount that back by 10% per year, and you get to a 2017 yearend fair value of roughly $420 and a 2018 yearend fair value of $460.
Bottom Line on TSLA Stock
Considering its robust long-term growth prospects, TSLA stock is materially undervalued.
But this stock needs a catalyst to get pushed up to fair value. That catalyst will be Model 3 delivery ramp, which will likely happen in 2018. All in all, I think TSLA stock could be due for another big rally over the next 12 months.
As of this writing, Luke Lango was long TSLA.
The post Tesla, Inc. Model 3 Will Drive TSLA Stock to $450 a Share appeared first on InvestorPlace .
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.