It’s difficult for Wall Street analysts to explain the momentum behind Tesla Inc. Some of them have never seen anything like it.
Tesla’s stock has more than quintupled since reaching its 52-week low in May. Since the beginning of 2020 alone, it has more doubled and in the past two days, it added an additional 36 per cent to its already unfathomable rally. It now has a larger market cap than the “Detroit Three” in General Motors, Fiat Chrysler and Ford Motor combined. The stock climbed just under 14 per cent to close at US$887.06 Tuesday.
And yet Tesla is still dividing analysts — nearly 50 per cent of them, according to Bloomberg, have a sell rating attached to the stock. More and more argue the move isn’t sustainable because they can’t say for certain what’s causing it.
The fundamentals don’t support it, and while there has been positive news, it’s not enough to justify the surge. It might be a short squeeze, a case of fear-of-missing-out for retail investors, or it might even be the cult of personality surrounding CEO Elon Musk, according to one analyst.
The rally might just be inexplicable, as Argus Research’s Bill Selesky found out. Selesky set a US$808 12-month price target on Monday that made him one of the most bullish analyst on the electric car maker. In one day, Tesla surpassed it, leaving him to question its sustainability.
“I didn’t think the stock would hit my price target within a week,” said Selesky. “That’s never happened to me before, but at the same time I think it’s just too high and too fast … It’s way out of control.”
Once seen as an easy target for short sellers, Tesla’s turnaround began in October, when it surprised analysts by posting a profit exceeding US$300 million, when they were expecting a deep loss.
In January, Tesla fuelled the momentum when it announced it had begun delivering Model 3 cars produced in a new Shanghai factory. Another profitable quarter followed, allowing the electric car maker to reach record revenues for the year. It’s no wonder Musk was dancing in front of his Chinese investors.
This week’s move was likely powered by Panasonic Corp.’s announcement that its battery partnership with Tesla had been profitable for the first time, Morningstar analyst David Whistom said.
“I don’t see why that merits a 20 per cent increase (on Monday),” said Whistom, who has a sell rating on the stock. “It’s positive information, but 20 per cent seems a bit extreme.”
That momentum can also be perilous. It has raised expectations for Tesla to what may be an unreasonable level.
If it’s 10 years, this lofty vision being offered out there probably does have some credibility. If it’s two, this is massively overdone.
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Craig Irwin, analyst, Roth Capital
Internally, Tesla is looking to post four consecutive profitable quarters in 2020 when the most it has managed in the past is two. Externally, investors and analysts are beginning to look at Tesla as a tech company instead of an automaker and are comparing its growth story to that of Amazon.com Inc.
In its base case for Tesla, New York-based investment firm Ark Invest expects the stock to reach a trading level of US$7,000 by 2024. Ark foresees the company being able to hit 40 per cent margins and take advantage of electric car sales making up one-third of total automobile sales in five years. The firm’s bullish case on the stock sees it reaching US$15,000 by 2024.
Whistom’s 10-year forecast for Tesla has a nine per cent earnings before interest and taxes (EBIT) margin, a metric used to determine profitability. It might be too conservative, he said, if it turns out that he’s not giving the company enough credit for its efforts in e-commerce, in-vehicle connectivity and infotainment.
Under the model Whistom uses, Tesla would need a 31 per cent EBIT margin to merit a US$1,000 share price. An alternative would be for the company to post an average of 42 per cent revenue growth per year from 2024 to 2028. Even that would only get it to US$950 per share, he said.
“I would feel negligent publishing a model with that in there today because it would be hard to justify,” Whistom said.
Roth Capital analyst Craig Irwin feels the same way about Tesla’s growth projections and its enterprise value. It’s currently trading at five times the EV of BMW, said Irwin, who also has a sell rating on the stock. The key to realizing them may depend on how long it takes other automakers to catch up.
“Will the automotive (original equipment manufacturers) catch up in the next two years or the next 10 years?” Irwin asks. “If it’s 10 years, this lofty vision being offered out there probably does have some credibility. If it’s two, this is massively overdone.”
As for any potential investors who may still be suffering from a fear of missing out, Selesky said a correction is possible in the short term. Whistom also warned that Tesla’s rocket could soon run out of fuel.
“If you put money into it long term and you can live with the volatility, you’re probably better off going with Tesla than going to a casino, but I still think it’s overvalued,” Whistom said.