Why Tesla Stock Could Be Headed to $1,200

Model S and X. Image source: The Motley Fool.

If you’re concerned that Tesla (NASDAQ:TSLA) stock’s recent wild run higher isn’t sustainable, here’s a counterargument for you. One analyst said this week that there’s plenty of excitement ahead for Tesla. Indeed, shares could rise to $1,200 over the next twelve months, he predicts. That would translate to an incredible 43% gain from the stock’s closing price on Monday.

How could Tesla stock be worth that much? It boils down to some enormous long-term expectations for the company’ss growth and profitability.

Let’s take a closer look.

The path to $1,200

Piper Sandler analyst Alexander Potter boosted his 12-month price target from $515 to $1,200 on Monday, reiterating a buy rating for the growth stock.

This price target is backed by some lofty expectations, including a forecast for Tesla’s annual vehicle deliveries to rise from about 500,000 last year to 894,000 this year and 5 million by 2024. By 2030, annual deliveries could climb to about 9 million.

Sandler is betting on nothing short of an electric vehicle revolution.

But what’s perhaps even more startling is Potter’s forecasts for Tesla’s free cash flow, or the company’s cold, hard cash left over after all operating expenses and capital investments are taken care of. He sees Tesla generating nearly $37 billion of free cash flow annually by 2025, up from $2.8 billion today. Highlighting how significant $37 billion of free cash flow is, Facebook‘s 2020 free cash flow was $23 billion. Microsoft‘s annual free cash flow is about $50 billion.

Getting to this kind of free cash flow, however, will require success across all of Tesla’s businesses, including energy storage, vehicle software sales, solar, and more.

2021 is key

Investors, of course, would be wise to eye Potter’s projections skeptically. Sure, Tesla is growing quickly and expanding its manufacturing capacity rapidly. In addition, energy storage sales are soaring. But it may be too early to bet on such rosy five and 10-year forecasts.

Tesla factory. Image source: The Motley Fool.

While it’s impossible to know whether Tesla will be able to live up to Potter’s wildly optimistic vision for the company, one thing is clear: the electric-car maker’s 2021 performance is key to the company’s growth story. Thanks to ongoing manufacturing capacity expansion at the company’s factories in China, Germany, and Texas, management believes vehicle deliveries can grow more than 50% this year — an acceleration from the 36% growth Tesla achieved in 2020. If Tesla can do this while simultaneously ending the year with enough production capacity for another year of approximately 50% growth in 2022, then Potter’s vehicle sales projections might start to look more realistic.

But investors will need more than manufacturing execution in 2021 to justify a $1,200 price tag. Tesla will need to start demonstrating substantial progress toward enabling its vehicles to drive themselves. If the electric-car maker can pull off autonomous driving, its vehicle software could command an incredible price tag and — more importantly — provide Tesla with a high-margin revenue stream.

While Potter’s borderline-euphoric boldness about Tesla’s future should raise eyebrows, it also serves as a starting point to think bigger. Is it possible that most investors are still underestimating Tesla, even after the stock’s astronomical 900% gain since the beginning of 2020? Or is Potter’s view too speculative to take seriously?