What To Know Investing in Tesla Stock?

You want to invest in Tesla stock(TSLA). However, you're not sure if it's a good investment. Even though Tesla is a great company, you may not be choosing the right time to invest.

If I said “Tesla is a great buy.” that statement would likely be wrong a few days or months later. 

Therefore, I am not going to do that. This is an evergreen guide that discusses the actual dynamics of Tesla as a company.

We will break down important factors that likely to affect Tesla stocks. Obviously, there is no way to know all factors, but my methodology should give you an idea of what to look for.

This post aimed to be a beginner guide to the Tesla investor. It can be helpful to those who want to diversify their portfolio and consider Tesla as an investment option. 

This post is not for individuals; 

• Who plans to trade or do high-frequency buying/selling to profit from market volatilities.
• Who tries to time the market tops & bottoms (buying at the lowest/selling at the highest)
• Who aren’t willing to do their own research and act according to the information they read on a single source.
• Who don’t understand position sizing, and investing without having a proper risk management plan.
• Who doesn't understand every investment carries a certain risk. In fact, investment is a risky business by itself.

Before starting

During your research about the companies, always take notes. File your findings so that you can revisit your notes later. Most people are lazy, they just read and leave trusting their memories.

Don’t trust your memory, take notes, have a folder to keep everything you find about the company in that folder.

When you buy a stock, you buy a small fraction of the real business. Therefore, you will need to go through Tesla's balance sheet, income statement, competition, and management in order to have a good idea about the company.

Stocks are regarded as long-term investments. Because it is hard to effectively calculate short term price movements. If you plan to invest in Tesla or any other stock, invest with the money you will not need for the next five years.

You can buy Tesla stock right now, at a specific share price, or systematically over time with dollar-cost averaging. In either scenario, you should have a solid investment strategy that will help you grow your money.

Let’s start by looking at Tesla’s company background. 

Company Background

Tesla, Inc. is a tech company focused on manufacturing electric vehicles, battery energy storage both for home and grid-scale. After acquiring SolarCity, the company started to produce solar panels and solar roof tiles.

Tesla headquarter is located in Palo Alto, California. However, the company operates on numerous manufacturing and installation plants. The main vehicle production facility is located in Fremont, California. Tesla Giga Nevada plant produces lithium-ion batteries.

Also, there is an electric vehicle subassembly factory near Reno, Nevada.

Tesla's Gigafactory 2, in Buffalo, New York, manufactures solar panels and electric vehicle chargers. Tesla Giga Shanghai produces final assemblies of Tesla vehicles.

As you can see Tesla is not a single niche business but has a lot of subsidiaries. Its activities are spread in various industries, as well as multiple production facilities. This is important for us.

Because considering Tesla as an “EV(electric vehicle) manufacturer only” would be a big mistake.

That said, it would probably take forever to mention the entire history of Tesla. We really cannot squeeze all about Tesla in this post. However, as a potential Tesla investor, you are highly recommended to read everything you can find about Tesla.

Knowing the company to the best of your ability is very necessary before making investment decisions.  

Tesla is not an average company that manufactures ordinary products. The company is operated by one of the world's best visionaries the world has ever seen. It's making the best vehicles ever engineered. They're not just vehicles but paradigm-changing innovations. 

Also, what makes Tesla truly different is the degree of innovation in every aspect of its business. From its production to sales and customer ecosystem everything is unparalleled anywhere else today.

People who invest in Tesla or buy their products usually are well educated, financially clever, and interested in tech. 

I could write a paragraph on each of those qualities, and still could be very lightly said. The Tesla owner’s network is a very unique group of individuals.

Most people perceive Tesla as a great company owned by genius Elon Musk that has accomplished incredible things.

If you truly want to decide where Tesla’s future can be, you should have a good understanding of its activity areas, customer profile, and the world economy.

What can affect Tesla Stock Price?

Use of Electrical vehicles

Fundamentally, electric vehicle use is expected to grow over the next two decades. However, it seems to be a steady growth rather than a quick jump. 

Image source: Bloomberg.

However, as you can expect nothing grows forever. There should be stagnation and regression periods following a growth trend.

Therefore, don’t take the above growth trend on a yearly basis but use more like a per decade basis.

Raw Materials used for manufacturing

All types of manufacturing processes need raw materials. The automotive industry or the other industries Tesla is actively working on also require certain materials and components to use in their manufacturing process.

For instance, almost all electric vehicles need metals like lithium, cobalt, nickel, and many more. Also, the metals by itself are far to paint the big picture when it comes to the required raw materials. 

If any of those materials get critically depleted or goes under a shortage, this can increase the manufacturing costs. No company can survive without profits. They would want to reflect these extra costs in their prices.

If somehow Tesla loses its competitive advantage this may adversely affect the company’s sales and profitability.

I am not going to be able to analyze the supply/demand balance for each required material for electric vehicle production. This is your job. Make a list of all required raw materials, and analyze their expected growth for the next 2 decades. 

There is a lot of reliable research made by universities or non-commercial entities you can trust their honesty. Find those researches and analyze what they are suggesting. As I have emphasized earlier, file your findings in order to revisit later when making your decision.  

For instance, I have found this article from a  reliable source that analyzes the lithium market. Find similar high-quality content from reliable sources and digest completely what they are sharing.

The method I recommend here is in fact how Warren Buffet invested in stocks. Buffett followed a value investing approach which looks for securities whose prices are groundlessly low based on their intrinsic worth.

Competition

Tesla is a great company, but there are companies doing a significantly great job as well. Many automotive companies are releasing their electric car models and working to outcompete Tesla. 

Companies like BMW, Chevrolet, Ford, Volkswagen, Kia are all electric car manufacturers. As soon as they see a big shift to electric car usage, they will use all their resources to grab Tesla’s market share.

It is expected that most automotive manufacturers will produce only electric vehicles by 2050. Therefore never underestimate what Tesla competitors can achieve, knowing they used to create vehicles way before Tesla even didn’t exist. 

This can negatively affect Tesla’s share but still, Tesla is the pioneer and the biggest player. 

Gas prices

Although electric cars are a great innovation, the widespread use of them depends on energy economics. People will not buy electric cars unless they clearly see cars run with gasoline are not more affordable.

Low priced oil will likely encourage conventional car use rather than electric cars. The exact opposite is also valid. If oil prices skyrocket the use of electric vehicles will be more common. 

US Economy & World Economy

You don’t need a degree in finance to know when the economy doesn’t do well stocks will not perform as well. However, in very rare cases a bad economy may positively affect certain industries.

For instance, during a pandemic, companies that produce cleaning materials or pharmaceuticals can do exceptionally well. 

It is also important to note, not only the US economy may affect Tesla’s stocks but also the world economy. Therefore we should be aware of what is going in the world.

This ingredient is the most difficult one to know about. However, as a value investor looking for the movement of a stock over a long period of time you shouldn’t be concerned about short term fluctuations in the economies.

Tesla’s Expansion Plans

It is also important to research if Tesla has aggressive expansion plans by the time you want to invest in its stocks.

Expanding businesses need cash, using profits to reinvest in their businesses. Therefore, aggressive growth may, in fact, suppress the growth in stock price even though the business continues to make a bank. 

Elon Musk by Himself

You will remember Elon Musk said Tesla’s stock price was “too high”. Following Mr. Musk’s statement, Tesla stocks dropped a whopping 10.3%.

Therefore, if any of the individuals in the power of management makes a negative statement it can also adversely affect the stock price.

Obviously, we have no control over this one. In fact, we have no control over any of these factors. Therefore we will make our analysis and make our best-educated decision. 

Does Tesla stock price correlate well with other assets?

Tesla stock may be correlated with other company’s stocks that supply raw materials for Tesla’s manufacturing processes. People love to build a correlation between different asset classes. They feel building such a correlation gives them a certain direction. 

In my opinion, this is a totally wrong type of approach to avoid. As they say in statistics: “Correlation does not imply causation”.  We cannot build a legitimate cause-and-effect relationship between two assets solely based on their correlation or association of them. 

Well, you may have seen the charts of certain assets moved together during a certain time.

For instance, gold and silver tend to move in the same direction and against the stock market. However, it is never guaranteed to help us to build an investment plan.

How Much Debt Does the Company Have?

It is important to know the debt-to-equity ratio of the company at the time of investing in it. Because a high debt-to-equity ratio is a big concern as more of a company's earnings need to go to paying debts.

Make your research and find out Tesla’s debt by the time you want to invest in the company. 

How Are Profit Margins?

A good profit margin is a sign of a business that is on a solid foundation. Therefore, make your profit margin analysis over a few years to have sufficient historical data about the company. A growing profit margin year by year is what you are looking to see in Tesla stock. 

When to buy Tesla stock?

Unless you have a simple and objective investment plan you will likely fail as an investor. I am not even talking about only Tesla but any asset class. If you want to find out if Tesla is a good buy, you need to do your objective analysis to decide if it is the right time to invest.

Read News But Never Act Upon Them 

If you give buy and sell decisions using the data suggested by newspapers, you are already a losing investor.

There are a few good reasons for me to say that. 

Firstly, everyone is reading the exact same news. If everyone acts upon the same news every investor has to be a profitable investor. However, only a minor portion of investors generate consistent profit from the markets over a long period of time.   

Secondly, the news is created to manage small investors' perceptions. Institutional investors rarely make a decision based upon the news. Because big money has to flow in the opposite direction where smaller investors invest their money. 

Third but not least, by the time you read news they are already old. Everyone else read or listened to it before you and took their position.

Believe it not, really big investors are using certain equipment to measure the change of frequency of the important people like the president or FED chairman in order to understand the actual situation, and if they tell the truth.  

Is it the right time to buy Tesla Shares?

The definition of the right time depends on the investment objective. Are you looking to buy Tesla shares to sell about a year later, or you plan to hold on to that to diversify your IRA?

Most investors buy a certain stock without having a plan. Plans are never guaranteed to work but it is always better to have one investing in a certain asset, in this case, Tesla shares.

What we don’t want is buying with the gut instinct and selling when it gives signs of a crash. This is not an objective plan. An objective plan eliminates the involvement of our emotions during the investment process.

Making predictions for tesla stock is not the best thing. Instead, we will use a certain technique to define if we should invest in tesla stock.

Is Tesla Stock overpriced?

No asset is never overpriced unless the opposite is proven. Analysts like to make assumptions if a certain stock is overpriced by looking at charts or certain indicators like RSI (Relative Strength Index or Stochastic).

Although it may give us a good idea, markets are not logical environments. Markets can move more illogically than you may stay solvent. 

For many investors Bitcoin at $3,000 was overpriced. However, it continued to ride the trend to almost $20,000. As an investor, your objective should be to sell your asset to someone else for a more expensive price, that is enough to make you make a profit. 

That said, we still want to use technical analysis to reduce our risks of buying at a potential top.

I have certain decision criteria that I will discuss further in this post. Is it a magical strategy that works every time? Absolutely no! However, it helps me to eliminate bad investments that I really don’t want to do. 

As I have said, markets are full of surprises. Anyone who is very sure what is going to happen in the future is either an inexperienced investor or he doesn’t invest his own money.

Think about it for a second. Who could ever know if we had a shortage of toilet paper due to a Pandemic? 

How to find a good entry point to buy Tesla stocks?

I have a few criteria I use almost religiously deciding if I would invest or not in a certain stock or any other asset class. It may or may not work for you. But this is how I minimize my risks.

Step #1: How much of a discount are shares trading at?

Open up the stock chart (Tesla for this example) that shows the last 5-year price history. 

Check if the price is at least at a %50 discount by looking at the most recent 5-year high price. If it is a yes, move to our next step.

Step #2: Is the current price under the 200SMA(Simple Moving Average)?  

200SMA is a very strong moving average that is respected in almost all markets. A lot of times price approaches to 200SMA and bounces back.

Buying at a price under 200SMA you eliminate your chances of buying expensive. If our second check is yes, then we move our 3rd step.

Step #3: Is RSI(Relative Strength Index) below 40?

RSI is an indicator that is used for technical analysis to spot overbought and oversold territories in the market. It is a very helpful indicator used quite commonly. 

By the time you want to invest in an asset its RSI value(by default 14 periods) should be less than 40.

If Tesla stock meets with all above criteria it can be a great buy. Keep in mind, no investment strategy is perfect. Therefore don't trust my word and make your own research.

Do you see how practical an investment strategy can be? It really eliminates our feelings projecting us with an objective investment plan.

We really don't need to make investment a complicated job, in fact, we could if we wanted.

The strategy I have just outlined is only the technical part. You should still be looking at the fundamentals that I have mentioned.

Conclusion

Tesla stock is an attractive investment choice and can be really profitable over time. Because the company is still young and has massive growth potential. However, that doesn't mean it is a “buy” all the time.

If you can do your fundamental analysis, and find it to be underpriced today, you may want to invest in it.

That said, have a certain Technical analysis strategy to look for a good entry point to the market. You can use either my strategy or any other strategy. However, have a plan in place as opposed to large crowds of investors.