At lunch on Tuesday the S&P/ASX 200 Index (ASX: XJO) is out of form and on course to record a decline. The benchmark index is currently down 0.5% to 5,946.4 points.

Here’s what has been happening on the market today:

Big four banks drop lower.

The big four banks are all trading lower at lunch and are weighing on the ASX 200 index. The Westpac Banking Corp (ASX: WBC) share price is the worst performer in the group with a decline of 1.2%. This is despite the banking giant announcing the appointment of its new chief financial officer this morning.

Altium sales update.

The Altium Limited (ASX: ALU) share price has dropped lower on Tuesday after the release of its sales data for FY 2020. As was expected, the electronic design software company fell short of its US$200 million aspirational revenue target because of the pandemic. Altium delivered a 10% increase in revenue to US$189 million thanks largely to a 17% lift in its subscription base to well over 50,000 subscribers. This means Altium has now recorded eight consecutive years of double-digit revenue growth.

Tech shares sinking lower.

Altium isn’t the only tech share tumbling lower today. A large number of tech shares have dropped deep into the red on Tuesday after their U.S. counterparts were sold off overnight. The tech-heavy Nasdaq index was up as much as 1.9% last night before ending the day 2.1% lower. Notable declines in the local tech sector include Afterpay Ltd (ASX: APT) and Xero Limited (ASX: XRO), which are down 7.5% and 4.5%, respectively.

Best and worst ASX 200 shares.

The best performer on the ASX 200 index is the Breville Group Ltd (ASX: BRG) share price with a 7% gain. The appliance manufacturer was the subject of a bullish broker note out of Morgan Stanley this morning. The worst performer has been the Afterpay share price with a 7.5% decline. Investors appear to be taking profit off the table in the tech sector on Tuesday.

More reading

• New investors could invest $1,000 into these top ASX shares
• Why Afterpay, Altium, Northern Star, & Pushpay shares are sinking lower
• Why Breville, Credit Corp, Pendal, & Whitehaven shares are charging higher
• Breville share price surges as top broker reckons it’s worth $62 a share
• Westpac share price lower despite announcing key executive appointment

James Mickleboro owns shares of Westpac Banking. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Altium and Xero. The Motley Fool Australia owns shares of AFTERPAY T FPO. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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In late morning trade the S&P/ASX 200 Index (ASX: XJO) has followed the lead of U.S. markets and is tumbling lower. At the time of writing the benchmark index is down a sizeable 0.8% to 5,929.4 points.

Four shares that have not let that hold them back are listed below. Here’s why they are charging higher:

The Breville Group Ltd (ASX: BRG) share price is up 5% to $24.06. Investors have been buying the appliance manufacturer’s shares after it was the subject of a positive broker note out of Morgan Stanley. According to the note, the broker has initiated coverage on Breville with an overweight rating and $28.00 price target. It believes the company is well-positioned for growth thanks to its $10 billion market opportunity.

The Credit Corp Group Limited (ASX: CCP) share price is up 5% to $16.03. This solid gain appears to have also been driven by a broker note. According to a note out of Morgans, its analysts have retained their add rating and lifted the price target on the debt collector’s shares to $19.10. This follows the release of its unaudited results for FY 2020 on Monday.

The Pendal Group Ltd (ASX: PDL) share price is up over 2% to $5.88. This morning the fund manager released its funds under management (FUM) update. That update revealed a 4% increase in FUM to $89.4 billion for the June quarter. This was driven largely by a significant rebound in global equity markets. Its FUM increase would have been stronger were it not for currency headwinds due to a strengthening Australian dollar.

The Whitehaven Coal Ltd (ASX: WHC) share price is up almost 5% to $1.53. Investors have been buying the coal miner’s shares following the release of its quarterly update. During the June quarter, Whitehaven delivered record ROM coal production and record managed saleable coal production. This means the company achieved its full year production guidance for both.

More reading

• Whitehaven Coal share price surges 10% on production data
• Breville share price surges as top broker reckons it’s worth $62 a share
• Top brokers name 3 ASX 200 shares to buy next week
• Why Lovisa, New Hope, Temple & Webster, & Whitehaven Coal are tumbling lower
• Why the Afterpay share price zoomed to a new record high today

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The NextDC Ltd (ASX: NXT) share price has risen strongly since the beginning of 2020, increasing from $6.58 to its current price of $11.03. That’s an increase of over 67%. An increased demand for cloud and data centre services during the coronavirus pandemic has helped to push the NextDC share price higher.

The locally based data centre provider continues to rapidly expand its portfolio of Tier III and Tier IV data centres throughout Australia.

Is the NextDC share price in the buy zone right now?

A compelling business model

In the data centre service market, ‘scale’ is very important.

When NextDC first entered the Australian market around 10 years ago, the data centre market locally was dominated by a few large global providers. These included United States based Equinix, Global Switch and Digital Realty. Also, the cloud computing trend was in the early stages of its development. However, NextDC has evolved significantly in recent years. It has now reached sufficient size and scale to be able to compete very effectively with these global giants in the Australian market.

NextDC is now the largest, locally-based provider by a long margin. The company has an impressive nationwide network of Tier III and Tier IV data centre facilities. Its extensive data centre network enables local and international customers to connect with a growing range of cloud platforms. This enables them to scale-up their critical IT infrastructure services.

Strong expansion nationwide continues

Over the last few years in particular, NextDC has continued to expand its national data centre footprint rapidly. And it is showing no signs of slowing down this expansion. NextDC recently announced that its data centres based in NSW had won several important customer contracts.

The continued strong growth of cloud computing is driving the ever increasing need for hyperscale data centres. Global technology research firm Gartner predicts that 80% of all organisations will shift their workloads into third-party data centres by 2025.

Over the last 4 years, NextDC’S customer base has grown at an impressive compound annual growth rate (CAGR) of 21%. It continues to expand with a number of data centres currently under construction. NextDC is also adding capacity at existing data centres.

Foolish takeaway

Despite its strong recent rally, the NextDC share price is still in my buy zone right now. I believe that the company is well placed to grow its market in Australia over the next few years. If achieved, this will flow through to strong revenue and profitability growth over the next 5 years.

More reading

• Why this small cap ASX tech share could be the next big thing
• How ASX investors can profit from the cloud computing boom
• Why the NextDC share price jumped 10% higher in June
• 3 high quality ASX 100 shares to buy right now
• Where to invest $1,000 in ASX tech shares today

Motley Fool contributor Phil Harpur owns shares of NEXTDC Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Twitter‘s (NYSE: TWTR) stock recently rose after the social networking company seemingly revealed the development of a new subscription platform in a job listing. The listing, which called for engineers to join its new “Gryphon” team of web engineers, stated the subscription platform would be “reused by other teams in the future” and be developed with its Twitter.com and Payments teams.

Twitter subsequently removed any mentions of “subscriptions” from the job posting, but many investors are likely wondering what Twitter is cooking up — and if it would diversify its business away from its online ad revenue, which rose less than 1% annually to $682 million, or 84% of its top line, amid the COVID-19 crisis last quarter.

Why would Twitter develop a subscription platform?

Twitter hasn’t revealed any more details about Gryphon yet, but the announcement hints at several potential projects.

Several years ago, Twitter surveyed users regarding their interest in paying for new analytics tools, breaking news alerts, and additional data regarding their followers’ tweets. Former CFO and COO Anthony Noto also previously discussed the possibility of adding paid services to TweetDeck, the power user app it acquired in 2011.

Those paid services, which were never implemented, could complement Twitter’s data licensing business, which gives companies (including news services and high-frequency trading platforms) paid access to a “firehose” of bulk tweets. Twitter’s “data licensing and other” revenue rose 17% annually to $125 million, or 15% of its top line, last quarter. Adding more services to that segment would boost the high-growth segment’s weight on Twitter’s top line.

Meanwhile, Facebook‘s privacy issues caused many people, including chief operating officer Sheryl Sandberg, to declare the social network would need to become a paid service if it removed its ads. Twitter CEO Jack Dorsey has repeatedly criticized Facebook over the past year, so he could be mulling the launch of a paid ad-free tier for Twitter.

Twitter could also allow its top tweeters to offer paid subscriptions to their accounts, as Amazon‘s Twitch does for its top broadcasters. Those subscribers could generate higher revenue per user than the platform’s online ads.

Twitter’s mention of its Payments team, which handles billings for ad campaigns, also suggests its “subscriptions” could target advertisers and developers instead of users. The Payments team could also expand Twitter’s partnership with online payments company Square (NYSE: SQ), which is also led by Jack Dorsey.

Twitter and Square teamed up for in-app payments five years ago, but that deal focused on political donations instead of the e-commerce market. Integrating Twitter’s tools into Square’s payment platform as a permanent subscription service for merchants could benefit both companies.

A chilly reception for paid social networks

Those ideas are interesting, but there doesn’t seem to be much demand for paid versions of social networks right now.

Fifty-eight percent of the respondents in a Washington Post poll in 2018 said they wouldn’t pay Facebook for a subscription. Of the rest, 16%, 15%, and 11% were only willing to pay $7, $5, and $1 per month, respectively.

Citi analyst Jason Bazinet recently estimated Twitter would need to charge U.S. users $50 annually and international users $20 annually to replace its lost ad revenue. Based on the chilly reception for a paid version of Facebook, those targets could be tough to hit for Twitter, which only has about 10% as many daily active users as Facebook.

But it’s all speculation for now

Twitter raised a lot of eyebrows with its latest job listing, but investors shouldn’t assume it’s launching a paid service to reduce its dependence on ads. Twitter already offers subscription services to companies and advertisers, and there’s no indication it will start charging users to remove ads or gain access to premium services yet.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

More reading

• Why Breville, Credit Corp, Pendal, & Whitehaven shares are charging higher
• Is the NextDC share price in the buy zone right now?
• Whitehaven Coal share price surges 10% on production data
• Is the Webjet share price a buy after falling 40% from its June high?
• 2 ASX shares that could be 10-baggers

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Leo Sun owns shares of Amazon, Facebook, and Square. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Amazon, Facebook, Square, and Twitter and recommends the following options: short September 2020 $70 puts on Square, long January 2022 $1920 calls on Amazon, and short January 2022 $1940 calls on Amazon. The Motley Fool Australia has recommended Amazon and Facebook. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The Whitehaven Coal Ltd (ASX: WHC) share price has rallied nearly 10% this morning after the miner released its June quarter report. Whitehaven revealed record coal production and sales in the June quarter. FY20 managed run-of-mine (ROM) coal production was 20.6 million tonnes (Mt) while managed coal sales were 17.5 Mt, achieving full year guidance.

What does Whitehaven Coal do? 

Whitehaven Coal operates four mines in the Gunnedah Basin of New South Wales, three open-cut and one underground. The mines produce metallurgical and thermal coal for export to economies in North and South East Asia. Coal is used in energy generation and steel production. Whitehaven’s high-quality coal delivers among the lowest carbon emissions per tonne of coal consumed in the seaborne trade. 

What did Whitehaven Coal announce? 

Whitehaven released its June quarterly report today which showed record ROM coal production of 8.2Mt for the quarter, up 17% on the prior corresponding period (pcp). June quarter managed saleable coal production was 6.2Mt, up 29% on the pcp. Managed sales of produced coal increased 13% on the pcp to 5.3Mt. This meant Whitehaven Coal met its full year production and sales guidance.

CEO Paul Flynn said, “Despite drought, bushfires and COVID-19 it was great to finish the year so strongly and achieve our ROM and managed sales guidance. Against an uncertain global economic backdrop Whitehaven is focused on optimising existing operations and observing disciplined capital management”. 

How has the Whitehaven Coal share price been performing? 

The Whitehaven Coal share price fell 46% from its February peak of $2.67 to its March low of $1.42. Since then, despite recovering somewhat, the share price has not been able to reach its previous highs. This morning’s announcement has, however, seen the Whitehaven Coal share price rally 9.6% to its current price of $1.60 (at the time of writing). The company’s reduced share price overall has meant Whitehaven Coal was removed from the S&P/ASX 100 (ASX: XTO) in the most recent quarterly rebalance. 

Bearish views on coal prices may account for the failure of the Whitehaven Coal share price to significantly rally since March. Coal prices have been under heavy pressure amid oversupply concerns. Production in Indonesia and Australia have remained strong despite weaker demand from China and India. The coal price has fallen from around US$75 per tonne at the start of the year to around US$50 per tonne currently. The rise of renewable energy sources, especially wind and solar power, is also putting downward pressure on coal prices. 

Whitehaven Coal is scheduled to release its full year results next month. At the same time it will reveal FY21 coal production and sales tonnages, as well as capital expenditure and unit cost guidance. 

More reading

• Why Breville, Credit Corp, Pendal, & Whitehaven shares are charging higher
• Why Lovisa, New Hope, Temple & Webster, & Whitehaven Coal are tumbling lower
• Why the Afterpay share price zoomed to a new record high today
• These ASX 200 shares were the worst performers of FY20
• Webjet and these shares were the worst performers on the ASX 200 in June

Motley Fool contributor Kate O’Brien has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The Webjet Limited (ASX: WEB) share price has continued its decline and is dropping lower again on Tuesday.

In morning trade the online travel agent’s shares are down 2% to $2.90.

This latest decline means that Webjet’s shares have now tumbled approximately 40% from their June high.

It also means the company’s shares are now trading within sight of their March low of $2.25.

Why is the Webjet share price sinking lower again?

It appears as though investors have been selling Webjet’s shares over the last few weeks for a couple of reasons.

The first is valuation concerns. Due to the dilution caused by its sizeable capital raising at the height of the pandemic, when Webjet’s shares were closing in on $5.00 in mid-June, its market capitalisation was on a par with pre-pandemic levels.

This was despite its shares trading nearly two-thirds lower than their 52-week high of $14.63.

I suspect that some investors were not initially factoring the dilution into the equation when valuing Webjet’s shares and may have started to sell them once this was better understood.  

In addition to this, the spike in coronavirus cases in Victoria is likely to be weighing heavily on Webjet’s shares.

With Melbourne in lockdown for upwards of six weeks and concerns that the virus could spread elsewhere, the recovery in the domestic travel market could be derailed.

While Webjet appears to have sufficient liquidity to last it until the end of 2021, if the pandemic goes on longer than expected, it could potentially require additional funding next year. This would likely dilute shareholders further.

And even if another capital raising proves unnecessary, the longer this drags on, the less funds the company will have available to make potential acquisitions.

Should you buy Webjet shares?

Despite the recent pullback in the Webjet share price, I’m not in a rush to invest. I would suggest investors keep their powder dry and wait to see how travel markets recover over the next 12 months before considering an investment.

The same applies to rival travel bookers Corporate Travel Management Ltd (ASX: CTD) and Flight Centre Travel Group Ltd (ASX: FLT).

More reading

• ASX 200 Weekly Wrap: Rocketing BNPL shares fail to stop ASX 200 slide
• Here are the 10 most shorted shares on the ASX
• 3 large cap ASX shares primed for expansion and M&A activity
• These ASX shares are the winners and losers in the “new normal”
• Why Afterpay, Alumina, Magellan, & Webjet shares are dropping lower

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Corporate Travel Management Limited and Webjet Ltd. The Motley Fool Australia has recommended Flight Centre Travel Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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I think that if you are going to make serious money on the share market, then you have to find 1 or 2 companies for your portfolio that enjoy rapid growth. These preferably shouldn’t make up a large percentage of your portfolio, but are still important inclusions. 

A ’10-bagger’ is a company that will return 10 times the original investment. In my own investing journey, a few notable 10-bagger successes include Cochlear Limited (ASX: COH), which I bought early, as well as Blackmores Limited (ASX: BKL).

At the moment, my investment into Sezzle Inc (ASX: SZL) has risen by ~140%. However, I have also lost money choosing the wrong shares, so it’s important to understand the risks involved and make sure you don’t take risks you aren’t comfortable with. 

After that caveat, here are 2 shares that I think could be future 10-bagger investments.

Medical 10 baggers

Recce Pharmaceuticals Ltd (ASX: RCE) (pronounced “recky”) saw its share price rise by 54% on 9 July, after it announced two of its products had been selected for a CSIRO trial into antiviral treatments for COVID-19.

However, this is a side issue for the company. Recce is developing a new type of synthetic antibiotic, targeting the emergence of superbugs. The company is focused on dealing with sepsis or blood poisoning, which is a life threatening reaction the body has to infection.

According to the medical journal The Lancet, sepsis killed 11 million people in 195 countries in 2017. Right now, sepsis remains an unmet challenge.

I think this company could be a 10-bagger, because the FDA has already awarded the company’s product, RECCE® 327, fast track designation, plus 10 years of market exclusivity, post approval. Also, in my opinion the company’s products are world changing in a very real sense.

Corporate communications

Whispir Ltd (ASX: WSP) is a potential 10-bagger share that I am watching very closely. The company offers a cloud-based communications workflow platform to its clients, facilitating automatised interactions between businesses and people. Although it has been operating for a long time, the company only listed recently. Like Recce, Whispir is not currently profitable. 

However, as a software-as-a-service company (SaaS), it has a few characteristics which I find interesting. First, it uses a subscription business model. This means much of its revenue, greater than 95% in this case, come from recurring revenue. Second, like all SaaS companies, it has a high operating margin – in Whispir’s case, that’s 62%. 

Also, the company appears to be focusing on the right metrics. It has seen its gross revenue rise by 20% in H1 FY20 versus H1 FY19. In addition, it has been able to increase its annual recurring revenue per customer by 17% versus H1 FY19.

Finally, as evidenced by the company’s H1 FY20 presentation, the list of Whispir’s clients is both long and diverse. This shows that the company’s products are versatile enough to appeal to a broad audience, as well as being a service companies need.

Foolish takeaway

When analysing a company to see if it could be a 10-bagger share, I try to take into account the following criteria. First, does the company address a need for industry or society? Second, do they have a track record of achievement? Are they actually making progress, or just full of hot air and fluff announcements? Third, do they have access to the cash they need to get to profitability?

For me, both of these shares meet this criteria. Good luck!

More reading

• Are these small cap ASX shares future tech stars?
• Why Galaxy, Platinum, Sezzle, & Treasury Wine shares are storming higher
• ASX shares tapping into the US market
• The rise and rise of ASX SaaS shares
• Why I think the Polynovo share price is a buy right now

Daryl Mather owns shares of Sezzle Inc. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Cochlear Ltd. and Whispir Ltd. The Motley Fool Australia owns shares of and has recommended Blackmores Limited. The Motley Fool Australia has recommended Cochlear Ltd., Sezzle Inc, and Whispir Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The Breville Group Ltd (ASX: BRG) share price is bucking the morning sell-off even as fears of a COVID-19 resurgence is forcing investors to retreat.

Shares in the kitchen appliance maker surged 5.1% to $24.15 in morning trade when the S&P/ASX 200 Index (Index:^AXJO) fell 0.6%.

Other consumer-facing stocks are also under pressure today. The Harvey Norman Holdings Limited (ASX: HVN) share price lost 1% to $3.53 while the Wesfarmers Ltd (ASX: WES) share price shed 0.5% to $45.81 at the time of writing.

$10 billion opportunity

A very bullish report from Morgan Stanley may be what’s firing the Breville share price. The broker initiated coverage on the stock with an “overweight” recommendation as it estimates the global serviceable market for Breville stands at $10 billion.

If you are impressed with that number, Morgan Stanley reckons the stock is worth $62 a pop – although you will have to settle for a more modest 12-month price target of $28 a share in the meantime.

Why the Breville share price could surge over $60

The $62 per share valuation is for FY30, and it assumes the group can achieve a 10% compound annual growth rate (CAGR) over the next 10 years.

“This assumes that BRG can capture 33% of the total revenue opportunity, or A$3.1bn at an EBIT [earnings before interest and tax] margin of 16.2%,” said Morgan Stanley.

“We then apply a terminal EBIT multiple of 15.5x, in-line, with BRG’s five-year average.”

Winning market share

Of course, this also assumes Breville can take market share from rivals. This looks likely given its proven track record in North America and Europe.

Further, the amount the group invests in research and development gives it an important edge over the competition. Management has also built a scalable business model that can support rapid growth, added the broker.

What’s more, the coronavirus pandemic is a positive for Breville’s business. Stuck-at-home consumers have been buying kitchen appliances as they have to cook at home more due to the lockdown.

The COVID cooking trend

Even after this medical emergency ends, some experts believe households might still spend more time cooking and baking at home compared to the pre-COVID-19 glory days.

The only thing about buying Breville now is that investors will have to cough up big for the stock, although that doesn’t bother Morgan Stanley much.

“Our A$28 price target implies 38x FY22E EPS [earnings per share], offering a 12% EPS CAGR (FY20-23E),” explained the broker.

“We think that BRG’s premium multiple is sustainable if they can continue their successful execution, given the scarcity of listed global growers in [Australia].

More reading

• Is the Star Entertainment share price a good buy right now?
• 3 top ASX 200 blue chip shares to buy
• 5 things to watch on the ASX 200 on Tuesday
• Why the Appen share price gained 53% in the first half of 2020
• Fund manager warns that ASX bank dividends facing multi-year bad debt hit

Motley Fool contributor Brendon Lau owns shares of Breville Group Ltd. The Motley Fool Australia owns shares of Wesfarmers Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Tesla (NASDAQ: TSLA) is among 2020’s hottest stocks. As of market close on Monday, the electric-car maker’s shares are up more than 250% year to date. Meanwhile, the S&P 500 is down 2%. The stock’s rise reflects investors’ growing confidence in the company’s long-term prospects as Tesla demonstrates impressive execution.

But has the stock got ahead of itself? After all, the stock’s valuation now prices in not only massive business growth, but also significant improvements in profitability in the years to come.

Are shares priced for perfection? Or is there still room for Tesla stock to run?

Valuing Tesla stock

It’s helpful for investors to understand exactly what kind of growth is priced into the stock today.

For Tesla’s market capitalization to rise at an average rate of 10% annually over the next 10 years from its current level, the company would have to have a market cap of about $721 billion 10 years from now. What would it take to command such a high price tag? Tesla would probably need annual net income of around $14 billion to $15 billion. Assuming the company trades at 50 times earnings (a reasonable price-to-earnings ratio if Tesla truly does prove it can grow that fast over the next 10 years), Tesla could command a market cap of about $700 billion to $750 billion in 2030.

What kind of sales growth might it take for profitability to rise to this level? If Tesla can achieve BMW‘s net profit margin of about 5% in 10 years, the company would need sales of about $280 billion to $300 billion by 2030 to achieve net income of about $14 billion to $15 billion, implying an average annual sales growth rate of about 27%.

Are expectations too high?

With Tesla’s revenue having grown much faster than 27% annually over the last five years, the above scenario may sound likely to some investors. But there are some major risks to the assumptions in this model. First and foremost, there’s a chance that profitability proves to be more futile than Tesla shareholders anticipate. In addition, if Tesla’s growth slows significantly toward the end of this 10-year period, investors may not believe the electric-car maker’s stock is worth 50 times earnings at the time; and if the stock commands anything less than a price-to-earnings ratio of 50 in 2030 (on $14 billion to $15 billion of net income), the stock’s return between now and then could be subpar.

Of course, there’s always a chance that Tesla will exceed even investors’ highest expectations. Perhaps, for instance, electric cars become more profitable than gas cars ever were, leading to a much higher net margin than 5%. Further, if Tesla’s software and driver-assist features get significantly better and help the automaker widen its technological lead over competition, the company may be able to earn more money from its vehicle software than the market anticipates.

The spectrum of potential outcomes is enormous. But given the wild growth that is priced into Tesla stock today, investors may want to hope for the stock to fall in order to help lower the risk of investing in a business that may be priced for perfection.

Big catalysts on the horizon

Does this mean current Tesla shareholders should sell their Tesla stock? Not necessarily. In light of the electric-car maker’s strong execution recently, including the launch of a new factory in China in 2019 and the beginning of Model Y deliveries earlier this year, investors may want to continue holding. Of course, this assumes shareholders are willing to endure significant volatility. Following such a huge run for Tesla stock, volatility is almost a given in the coming months.

Tesla’s business may still be early in its growth story. Even in the near term, the automaker’s growth could be significant. The company’s March-launched Model Y, for instance, has the potential to outsell the company’s best-selling car (Model 3). After all, SUVs like the Model Y often outsell sedans in many markets. Further, Tesla is notably planning significant production capacity expansion this year — and it doesn’t plan on slowing down next year.

Later this month, investors will get a timely window into Tesla’s business to see if it is living up to expectations. The electric-car maker reports earnings on July 22.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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• Short sellers are betting US$20bn against the skyrocketing Tesla share price
• ASX investors have been buying these 5 international shares
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• Here’s why Tesla stock surged to all-time highs on Tuesday

Daniel Sparks has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Tesla. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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