So you wisely bought Tesla stock before its parabolic rise up in early 2020 and are wondering whether to sell or not. So am I! My belief is that shareholders should NOT sell Tesla stock, but hold on for the long-term. Let me share some more reasonings why.
I bought Tesla stock in 2H2018 after I met Elon Musk at a wedding. At the time, there was all type of media hoopla about him being unstable, smoking marijuana on Joe Rogan, sending out missive Tweets, and so forth.
I wanted to see for myself whether Elon was indeed unstable or a stable genius. I decided after observing him for a couple hours and meeting him briefly that he was the latter. The media was blowing things way out of proportion. I bought 300 shares in multiple tranches between $280 – $310.
The stock did well and then started to plummet in 2019. When it recovered to the $400 – $420 level, I decided to sell half my shares and lock in a 30% gain. At the time, I felt good because I was down about 30% at one point. In retrospect, selling was a mistake.
Below is my existing holding.
Should You Sell Tesla Stock
It is very tempting to sell Tesla stock after the rise over $700 and almost to $1,000. But I encourage you to hold on for the long-run. Tesla could very well be the next trillion dollar company like Google, Microsoft, Apple, and Google. Now that Tesla is gaining momentum, it could also be acquired for a huge premium.
But first, let's face facts. Tesla is not a profitable company. In fact, Tesla lost almost a billion dollars in 2019. The great concern with Tesla is whether it can survive long enough to be profitable. Many analysts in 2018-2019 questions its viability, figuring it would need to raise new capital to fund operations.
The good thing about the losses is that they are shrinking. Tesla is expected to make a profit by 2021, if not by 2020. Once scale is achieved and costs are controlled, the upside for Tesla is tremendous.
Because Tesla is unprofitable, you can't value the company based on earnings or operating profits. Instead, you have to base Tesla on its future revenue and earnings.
In comparison to the other global automakers, Tesla's output is tiny. Yet Tesla is valued at more than almost all other automakers today due to its potential.
Given Tesla has been solely building electric vehicles since 2008, Tesla has a MASSIVE head start and technological advantage over the other automakers. Do you really want to buy a Toyota or Mercedes EV when you can buy a Tesla for a similar price and superior technology?
Tesla is rapidly reducing its manufacturing costs. By the time other automakers “catch up” they will realize they are still very far behind.
What some investors also fail to realize is that Tesla is not just an electric vehicle company. Tesla is positioning itself to be a transportation and power conglomerate.
Below is some probability analysis from Ark Investment Group, who is bullish on Tesla. The right-most column also has its various share price targets by 2024. Notice the details of each Scenario.
In 10 years, there is a decent that Tesla extends its electric vehicle lead, lowers production costs, builds an autonomous global transportation network, becomes a power conglomerate, creates new efficient modes of transportation, turns into the next Amazon, and also becomes highly profitable. Just in case Tesla does reach all these goals, I don't want to miss the electric bus.
Do you really want to miss the electric bus if Tesla becomes the next $1 trillion market capitalization company like Microsoft, Amazon, Google, and Apple? I don't think so.
Clearly, Tesla stock is priced to perfection. Any execution missteps or earnings misses will cause the stock to tumble. Heck, the stock could easily correct 30% on no news one day given how quickly the share price has risen.
But as a long-term investor, you need to ride out the volatility and buy the dips.
When To Sell Tesla Stock
Tesla's share price has gone up way too fast. Its price performance mirrors that of Bitcoin's parabolic 2017 price performance. Then Bitcoin came crashing down because of many hiccups and lack of expected hopes.
I never recommend chasing a stock that has gone up 50% in a matter of months. Instead, I would wait for any 5% – 10% to start legging into a stock.
You can take a timing risk by selling Tesla stock over $750/share. I think there's a 65% probability the stock will correct below $750/share so you can buy back. However, there's a 35% probability that Tesla will shoot back over $1,000.
As a result, it's best to hold onto at least 80% of your Tesla stock for the long term. Selling some shares to lock in some gains is never a bad idea. But I see Tesla as still in the second or third inning of a nine inning ball game.
Below are some further model assumptions from ARK Investment Group on Tesla stock. Even in a Bear Case scenario, Tesla could return 100%+ in 4-5 years time.
When investing, it's important to invest in an entrepreneur and leader who is brilliant and constantly looking into the future. I think Elon Musk is one of the best people to look and plan ahead.
Tesla stock has a lot to live up to. I have no doubt Tesla's share price will exhibit tremendous volatility over the next several years. However, I'm bullish Tesla will continue to grow and revolutionize the transportation and power industry.
I don't plan to sell some Tesla stock until it reaches $1,500/share or more. If you're already way in the money, I recommend holding on for the long-term as well.
About the Author: Sam worked in investment banking for 13 years at GS and CS. He received his undergraduate degree in Economics from The College of William & Mary and got his MBA from UC Berkeley. In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $250,000 a year in passive income, most recently helped by real estate crowdfunding. He spends most of his time playing tennis and taking care of his family. Financial Samurai was started in 2009 and is one of the most trusted personal finance sites on the web with over 1.5 million pageviews a month.