Could Tesla Stock climb to $ 780?

Despite You’re here (NASDAQ: TSLA) of stocks that have climbed nearly 800% in the past year, an analyst believes stocks have important lead for further growth. Shares could reach $ 780, the analyst said in a note to investors this week. That translates into an impressive 31% gain over Thursday’s closing stock price of around $ 593.

Does this analyst’s bullish outlook make sense? Let’s take a closer look.

The path to a 30% gain

Goldman Sachs Analyst Mark Delaney raised his price target for Tesla stock by 71% this week, from $ 455 to $ 780. The target price implies that Tesla could soon be worth more than $ 700 billion. What is behind his thesis?

First, Delaney believes electric vehicles may become mainstream sooner than he originally anticipated. Specifically, he thinks electric vehicles could account for 18% of new car sales worldwide by 2030 and 29% of new sales by 2035. And what are the drivers of this mass market adoption? Falling battery prices and the deployment of new models of electric vehicles, he predicts.

Wider market adoption will result in a rising tide that will lift all boats from automakers who bring compelling EVs to market, Delaney believes. As the world’s leading manufacturer of electric vehicles, Tesla is, however, well positioned.

In addition, Delaney expects further expansion of Tesla’s operating margin. The company achieved an impressive 6.3% operating margin for the last 12 months, largely putting an end to concerns about the company’s ability to make a profit. Going forward, however, the automaker has said it expects this key measure to improve.

“We expect our operating margin to continue to grow over time, eventually reaching peak levels with ongoing capacity and location expansion plans,” Tesla said in its third quarter letter to shareholders.

Delaney believes Tesla’s continued efforts to vertically integrate its operations will help the company reduce costs and, ultimately, improve its operating margin. To that end, Tesla’s management is focused on vertically integrating battery manufacturing over the next 10 years – and the company expects this to lead to substantial cost savings.

Additionally, Delaney believes a shift in the sales mix to the Model Y (a slightly more expensive vehicle than the company’s Model 3) and high-margin vehicle software sales will help boost Tesla’s operating margin.

Walk carefully

As Delaney raises promising points about Tesla’s outlook, investors should keep the growth stock’s costly valuation in mind. With a market capitalization of $ 560 billion today, despite only $ 28 billion in revenue over the past 12 months and $ 1.8 billion in free cash flow over the same period, shares of Tesla are priced close to perfect.

The market has arguably already factored in both rapid revenue growth and expanding margins for years to come. Could Tesla surpass even these high expectations?

It’s possible. But investors should take Delaney’s buy note on the stock with a grain of salt. The story is fascinating, but the evaluation leaves little room for error.