Tesla Motors (NASDAQ: TSLA) is once again the talk of the automotive world.
Last week, the company’s Model S electric vehicle was named the “best overall” car for 2014 by Consumer Reports. The magazine raved that the car is a “technological tour de force” that is “brimming with innovation.” The honor was announced Tuesday, hours after Morgan Stanley analyst Adam Jonas bestowed a different kind of honor on the company, boosting his target price for the stock from $153 to $320.
Tesla stock had already rallied after the company posted better-than-expected quarterly results last week and said deliveries of the Model S would jump 55 percent this year, but the Morgan Stanley note helped push shares into overdrive. The stock surged 14 percent Tuesday and another 2 percent Wednesday, closing at $253. It has now gained more than 35 percent in just the last five trading sessions – and more than 600 percent over the last year.
Tesla, founded in 2003, now has a market capitalization of more than $30 billion, about half as big as that of Ford or General Motors.
Could it be that, despite the accolades and outlook, Tesla is overheating?
The stock got its latest charge from the company’s announcement that it plans to build the world’s biggest battery plant, called a “Gigafactory,” to ramp up the number of batteries it can produce from 24,000 last year to more than 100,000 by 2018. Morgan Stanley’s Jonas noted that the batteries that the company is developing might also have applications for electric utilities, and that Tesla could be a huge disruptive force not just in the car business but in the $2 trillion global electric utility market as well.
Jonas and other analysts suggest that the batteries being developed by the company for its vehicles could also be huge moneymakers as storage devices for the electric grid. “If it can be a leader in commercializing battery packs, investors may never look at Tesla the same way again,” Jonas wrote. ‘‘If Tesla can become the world’s low-cost producer in energy storage, we see significant optionality for Tesla to disrupt adjacent industries.’’
Certainly, not all analysts are as upbeat on the stock as Jonas. The recent jump puts the stock well above analysts’ median 52-week price target of $213.50. Estimates range from $65 to $325.
Bank of America Merrill Lynch analyst John Lovallo reiterated his $65 price target for the shares last week. "We believe it is important for investors to remember that Tesla is an auto manufacturer, first and foremost, which is an inherently capital intensive business," he wrote in a note to clients Thursday. "In our view, the Gigafactory investment will translate to even more capital intensity and add further pressure to margins and returns."
Stifel Nicolaus analyst James Albertine sounded a cautious note ahead of the most recent earnings report, warning clients that the gain in shares of Elon Musk’s electric vehicle company over the past year was “likely driven more by chatter around a takeout than [its] fundamentals.”
After the earnings news and the Gigafactory details, Albertine expressed a bit more optimism. “By serving the energy market directly, TSLA may only be a handful of supply contracts away from offsetting initial factory investments and providing a long-term view on profitability, market share and industry size,” Albertine, who doesn’t have a price target on Tesla, wrote in a note to clients. “We also believe TSLA may be uniquely positioned to help eliminate inefficiencies/bottlenecks among current lithium-ion battery suppliers globally, and potentially re-invent the profitability curve for battery production.”
The analyst notes, though, that the road ahead for Tesla won’t be easy and the Gigafactory it is building will cost as much as $6 billion and take about three years to construct. He is maintaining his “hold” rating on Tesla for now, though he acknowledges that the Tesla grid storage opportunity could justify a higher valuation.
Albertine isn’t the only Wall Street analyst cautious about Tesla. According to Reuters, six other Wall Street analysts have “hold” recommendations on the stock, while four rate it a “buy” and two expect it to “outperform.” Deutsche Bank analyst Dan Galve, for one, recently slashed his rating on Tesla from “buy” to “hold,” arguing that the company’s valuation can’t be justified by its fundamentals. Galve also cut his price target on Tesla to $200 from $220.
“In addition to the tight valuation, we believe the ramp in operating expenses, uncertainty around the giga-factory, uncertainty around distribution network needs to support higher volumes, and multiple competitor vehicles entering the market will make it difficult for investors to get a clear picture of the true late-decade earnings power/margin profile of the company,” Galve, who wasn’t available for comment, wrote in note to clients.
Tesla sold about 22,500 of its Model S sedans in 2013 and expects to sell about 35,000 this year as it ramps up production. The cars sell for $70,000 and up, though, and many Tesla buyers don’t use the vehicle as their only means of transportation. For the company to be successful that is precisely the type of consumer it needs to attract, Albertine says. So far, he suggests, there isn’t much evidence that people will purchase electric vehicles sold at lower price points — and that Tesla can really become a carmaker for the mass market.
“The demand is not there,” says Albertine, adding that most car buyers view their vehicles more as utilities than luxuries. “Remember who you are selling to.”
Indeed, if Tesla were a widget company, the stock would be difficult for Wall Street analysts to recommend. According to Bloomberg, Tesla trades at more than 140 times projected 2014 earnings, well above Facebook’s forward price-to-earnings ratio of 55 and Google’s 23.
Many investors, though, appear willing to throw caution to the wind. As Bloomberg noted on Friday, Tesla has become the hottest auto stock in at least two decades. Whether it continues to be that hot may depend, at least in part, on if investors keep seeing it just as an auto stock, or as an energy industry disruptor too.
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