Tesla Stock Nears $300: What Investors Need to Know

By Daniel Sparks Markets Fool.com

Tesla (NASDAQ: TSLA) stock is surging on Monday, following the company's record first-quarter deliveries. Shares are up about 6.6% at the time of the writing, trading at about $297. The rise adds to the stock's roaring gains recently, with shares up an impressive 63% since Dec. 1.

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As the stock hits a new all-time high on Monday and nears $300, it's a good time take a step back and consider what's behind the rising stock price -- and what it means for investors.

Tesla Model X (left) and Model S (right). Image source. Tesla.

Tesla's Model X is a hit

As vehicle sales soar 69% year over year in Tesla's most recent quarter, one recent and undeniable key driver for the company is its late-2015 launched Model X SUV.

After its launch in 2015, there were lots of doubts about both Tesla's ability to produce such a complex vehicle and about how demand for the Model X's flashy falcon wing doors would fare. Further, Tesla's first few quarters of worse-than-expected Model X production -- as management cited "hubris in adding far too much new technology to the Model X in version 1" -- didn't help concerns about the vehicle's potential.

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However, with Model X deliveries in the company's first quarter of 2017 up 318% year over year, Tesla has proven it can both ramp up production and build the vehicle in meaningful volumes. Tesla delivered a record 11,550 Model X units in its first quarter, up from 2,400 units in the year-ago quarter.

Data source: Tesla's quarterly SEC filings and delivery updates. Chart by author.

Model 3 is coming

Another key driver in Tesla's stock recently is management's ability to stick to its aggressive timeline for its upcoming Model 3 so far. In early 2016, management was still saying it didn't expect Model 3 production to begin until "late 2017." But after announcing in May last year that management was moving its target for annualized production of 500,000 units two years earlier, from 2020 to 2018, the company has also been moving its Model 3 launch timeframe earlier.

Now Tesla is aiming for Model 3 production to begin in July. In addition, Tesla is maintaining its aggressive guidance for a 500,000-unit annualized build rate next year. Notably, Tesla is only building about 100,000 units annually today, so even if Tesla fell short of its target to build 500,000 vehicles in 2018 by 150,000 units, production would still soar.

With Tesla delivering strong Model S and Model X deliveries in the first quarter, and management setting the stage for Model 3, investors are betting on hockey-stick-like growth in the company's underlying business.

Tesla stock's valuation implies monstrous growth

As shares hit a fresh high, investors should keep in mind that the stock's valuation is now essentially betting on not only excellent execution with the Model 3, but also sustained growth in the company's overall business for years to come.

Model 3. Image source: Tesla.

To better grasp the massive future growth priced into Tesla stock, consider that the electric-car maker has sold about 86,500 vehicles in the trailing 12 months, yet its market capitalization of $48.4 billion is several billion dollars greater than Ford's at the time of this writing. And Ford, of course, sells millions of vehicles per year -- 6.65 million in 2016, to be exact.

Of course, Tesla is betting on more than vehicle sales to boost its business. Indeed, that's why the company recently dropped "Motors" from its name. Tesla is betting its fast-growing energy storage business, 2016 acquisition of SolarCity, and rapid deployment of autonomous vehicle technology will all become significant growth drivers.

Given the speculative nature of the growth expectations built into Tesla's stock price today, investors should consider risks associated with the stock carefully before buying.

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Daniel Sparks owns shares of Tesla. The Motley Fool owns shares of and recommends Ford and Tesla. The Motley Fool has a disclosure policy.