Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Tesla Motors Inc (TSLA): What Should Investors Do?

A rise in Tesla Motors Inc (NASDAQ:TSLA)‘ stock price now seems almost like an expected daily occurrence. Though the company is certainly firing on all cylinders, is this gain getting out of hand? Maybe. But that doesn’t mean it’s time to sell.

Huge expectations

Tesla Motors Inc (NASDAQ:TSLA) plans to sell 21,000 fully electric Model S vehicles this year. Next year, it plans to sell 40,000. Ambitious, right? Not when these plans are viewed in the context of the company’s valuation.

Tesla Motors Inc (NASDAQ:TSLA)

In order for Tesla Motors Inc (NASDAQ:TSLA)’s current valuation to make sense, it will have to reach annual sales of about 500,000 vehicles. According to some conservative estimates, Tesla could earn $880 million per year in operating income at this level. This would put Tesla, at today’s market capitalization, at about 23 times operating income — still expensive, but at least reasonable.

Sure, Tesla Motors Inc (NASDAQ:TSLA) looks poised for an awesome future. What’s more, the company’s heavy investment in supercharger stations helps make CEO Elon Musk’s huge ambitions seem more realistic. And, most importantly, the management team has proven it can execute.

When it’s all said and done, Tesla Motors Inc (NASDAQ:TSLA) is the type of company many investors like to hold in their portfolio. But price matters — and the higher the stock soars, the further we venture into speculative territory. At today’s price, the expectations for Tesla are simply enormous.

What should investors do?

If Tesla Motors really is officially in speculative territory, does that mean it’s time to sell? Not necessarily.

Investors with a Foolishly long-term time horizon can use time as a tool to help them invest better. Unlike the Street, there’s no reason for individual investors to be in a hurry.

Investing with the intention of holding for the long haul allows investors to invest less like traders and more like business owners. It empowers them to be less concerned with the short-term market gyrations that are, for the most part, completely unpredictable. Sure, history tells us that a growth stock with a lofty valuation (like Tesla) will likely have a very volatile ride. But a long-term time horizon allows investors to forget about that and look at the underlying business.

Fundamentally, Tesla Motors is mostly exceeding the Street’s expectations. The company’s revenue is soaring, and its gross profit margins continue their impressive climb.

With supply limited, Tesla is selling every Model S it can make. As the company expands internationally and ramps up competition, sales should continue to soar.

In other words, Tesla as a business seems to be doing exceptionally well. Sure, investors expect this. But with the company going above and beyond what the Street expected, there’s no reason to sell this stock.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.