Making the fundamental case for Tesla at $900 and one day… $7,000

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Despite Tesla’s meteoric rise, which has seen the shares more than double this year, some investors argue that the company’s fundamentals and future growth justify its current valuation and stock price.

Underlying the bull thesis is that Tesla and its founder Elon Musk are at the forefront of a push towards a greener future, and that the company’s position as an early adopter gives it a competitive advantage in the market. Not only is Tesla a leader in electric vehicles, but its growing battery, solar and autonomous driving divisions will fuel future gains.

Essentially, it’s a leader in its field, and the competition is well behind, say those who favor the stock.

“I think they have potential for a trillion dollars of revenue within 10 years, so basically you’re looking at the very start of Tesla; this can be one of the largest companies in the whole world,” billionaire investor Ron Baron said Tuesday on CNBC’s “Squawk Box.”

Baron said he’s not selling one of the nearly 1.63 million shares that his firm, Baron Capital, holds. In addition to strong demand for the Model Y and Cybertruck, he noted that the company’s energy storage business is doubling each year, and that the solar division, which he said is just getting started, is already worth between $40 billion and $50 billion.

“It’s not just the next 10 years that’s going to be phenomenal growth, it’s going to be years after that,” he added.

The bullish investors still see a fundamental case for the company at these levels, even as many others decry the run as a bubble. On Tuesday, Tesla was trading around $930, up about 120% for the year.

$7,000 target

Investors who are optimistic on the stock highlight that the company has a competitive advantage in the electric vehicle market since they’ve been manufacturing 100% electric vehicles since 2008 — well before other auto companies — and also because they can streamline their operations since they focus solely on electric vehicles. Other companies, however, have to split their operations between internal combustion engine and electric vehicle manufacturing.

And the more vehicles Tesla makes, the cheaper each one becomes to produce. On Monday Panasonic, which has a joint venture with Tesla, said their automotive battery business was profitable for the first time, and also that they would be ramping up production to keep up with demand from the automaker.

“Tesla has not lost market share in the EV market and traditional autos have had a really hard time producing a car that’s on par with Tesla in terms of a dollar per performance or efficiency basis,” ARK Invest’s Tasha Keeney told CNBC Tuesday. The firm has been a long-time supporter of the company, and on Friday raised its 2024 target on the stock to $7,000.

“We’ve also seen them scale Shanghai in less than a year which is incredible progress. They’ve proven that they can scale in a capital efficient manner.” She said that one of the most under-valued areas of the business is Tesla’s autonomous data and hardware unit, which is significantly ahead of competitors.

Taking profits

At a time when investors have started to place a premium on “green” and “clean” companies, Tesla is uniquely positioned. Ross Gerber, CEO of $1.1 billion Gerber Kawasaki, noted that through the auto, solar and battery business Tesla is “creating a sustainable future for people in one company.”

“Tesla has proven that you can do this profitably and I think it’s the only company in the world positioned to really create a solution for climate change,” he added.

That said, while Gerber’s a long-term believer in Tesla, he said that the valuation has become stretched and that there’s “a lot of capital flowing into Tesla irrelevant of the valuation.” He’s been taking profits for clients, noting that a fairer valuation for the stock is around 60 to 70 times earnings.

“I love the company and I think it has a bright future, but I’m not advising people to buy the stock at $900.”

Gerber believes the surge higher in Tesla is being partially driven by retail investors as well as mutual funds looking to own the stock at any price. Others argue that this could be a short squeeze as investors who are short the stock rapidly buy shares to cover their position.

Whether or not the recent surge is justified, Morgan Stanley analyst Adam Jonas noted that a tipping point of sorts may have been reached in the auto market.

“Is it just us or is Tesla’s market cap coinciding with bigger forces driving the end of the ICE age?” he said in a note to clients Tuesday. He pointed out that 4 different car companies ran ads for electric vehicles during the Super Bowl, suggesting a possible shift in consumer sentiment. He has an underweight rating and $360 target on the stock, although he has praised Elon Musk and his grand ambition.

NYU Stern Professor Aswath Damodaran, who is often called Wall Street’s Dean of Valuation, succinctly summed up the Tesla debate. “It is a company where there is no middle ground, with the optimists believing that there is no limit to its potential and the pessimists convinced that it is a time bomb, destined to implode,” he wrote in a recent blog post.

– CNBC’s Michael Bloom and Nate Rattner contributed to this report.

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