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Tesla investors do the electric slide

You know a company’s stock is floating toward bubble territory when even its biggest shareholder implies that it’s overvalued. Last September, as shares of electric-car company Tesla Motors (TSLA) were peaking at $286, Tesla CEO and co-founder Elon Musk told CNBC that “people sometimes get carried away with our stock … Our stock price is kind of high right now.” Since then the markets have made Musk both prophetic and considerably poorer: Tesla’s stock is down by about a third, hurt by delays in the launch of its Model X SUV and by the fast-falling price of oil, which has raised doubts about demand for electric vehicles.

Even after this steep slide, Tesla recently traded at a lofty 232 times expected 2015 earnings, making it 11 times as expensive as the average Nasdaq stock. Yet that stratospheric price looks, to some investing pros, like a screaming buy, and many have taken advantage of the recent tumble to increase their stakes. Their passion for the company explains why Tesla’s stock has been so good at defying gravity, even as it seemingly defies market fundamentals.

Since the beginning of 2013, when sales of Tesla’s Model S sedan took off and the company turned its first (and so far only) quarterly profit, its stock has returned almost 480%. Tesla has wowed investors by delivering an electric sedan that feels more like a luxury Internet-enabled Batmobile for the Silicon Valley elite than a tree-hugger’s ride. It has won top accolades for both safety and performance, while wooing gearheads with features such as the ultrafast acceleration dubbed “insane mode.”

But the stock’s streak has also made Tesla the poster child for bearish speculation about tech-sector excess. Consider that the company, which has never posted an annual profit, has built a $25 billion market cap—nearly half the value of General Motors, a company that typically sells more cars in a week than Tesla does in a year. Tesla, meanwhile, has missed its car delivery targets for two quarters in a row, while further denting its earnings with big capital expenditures on its battery “gigafactory” and network of charging stations. Fuller & Thaler Asset Management recently slashed its stake in Tesla by nearly 80%, concluding that the stock’s “overhyped” public image would be a “perpetual drag” on performance, according to portfolio manager Raife Giovinazzo.

Tesla recently traded close to a 52-week low, and short interest has risen to 27% of floating shares (the average for Nasdaq stocks is about 5%). By some measures, the stock’s valuation actually grew during the slide, because earnings estimates fell even further than the share price. But some investors—including managers at institutions such as Fidelity and Prudential—have interpreted the bearishness as a contrarian buying signal, arguing that Tesla is poised to surpass Wall Street’s low expectations. “If you buy the stock here, you’re going to benefit when sentiment inevitably turns,” says Josh Spencer, manager of the $1.7 billion T. Rowe Price Global Technology Fund, which recently bought more Tesla.

Tesla bulls aren’t betting on sentiment alone. Morgan Stanley auto analyst Adam Jonas says Tesla’s early success and tech prowess have persuaded other car manufacturers to view it as a disruptive competitor. When he makes presentations to other automakers, the execs “only want to talk about” Tesla, Jonas says. “This is a very arrogant industry, [but] they’re still willing to admit that Tesla makes a damn good car.”

Given Tesla’s luxury pricing—the average out-the-door price is above $100,000—bulls aren’t worried that lower oil prices will reduce demand: For an automotive aristocrat, fuel savings from a battery-powered vehicle are just icing on the cake. Tesla already has 20,000 pre-orders for the Model X: That kind of popularity could enable Tesla to “gush cash” in the future, Spencer says.

Of course, as skeptics and bulls agree, Tesla’s current share prices make sense only if the company eventually sells many, many more cars than it does now. (The company says it expects to deliver 55,000 in 2015.) Hedge fund manager and noted short-seller Whitney Tilson of Kase Capital Management bet against Tesla in 2012 (when it traded just over $30) and came to rue it. Today he tells Fortune that Tesla has “executed superbly to create a revolutionary product,” and says he’d even be willing to buy the stock—but only at a tiny fraction of its current valuation. In the meantime, he’s put down a $5,000 deposit for a Model X, “which looks amazing.” 

This story is from the April 1, 2015 issue of Fortune.