Is Tesla Stock Worth $65, $320, $229, or… ?

Admittedly, this article is jumping off of an article that is ~3 weeks old, which is probably ancient in the world of investing, but I think it’s still useful and interesting for the underlying points.

At the end of February, Adam Jonas of Morgan Stanley projected that Tesla stock could go up to $320 within 12 months, one of the higher estimates on the table, while John Lovallo of BofA Merrill Lynch had its target at $65. Kirk Lindstrom, decided to examine the arguments behind each case over on Seeking Alpha.

Jonas vs Lovallo

Jonas’ $320 was a doubling of Morgan Stanley’s previous target price of $153! From the article:

Key assumptions are:

1. “Tesla’s annual sales to reach almost 400,000 units by 2020, and around 1.1 million units by 2028.” This would give Tesla a global market share of roughly 0.9% by 2020.

2. The new “Gigafactory” will cut the cost of the battery nearly in half: “With full-scale battery operations, Tesla battery packs used in the Model S, which currently cost over $15,000, could eventually cost close to $100 per kilowatt hour (kWh), or around $8,500 apiece.”

3. Much arm-waving about the benefit of being in the Silicon Valley with a lot of us smart people: “Tesla is Ideally Positioned to Lead the Autonomous Cars Segment.”

4. Opportunity in Energy Storage for the Home and business markets. “Electric utility demand in the US is currently a $400 billion business and a $2 trillion business globally. Morgan Stanley believes the opportunities in this space are boundless.”

Lovallo, meanwhile, thought that there wouldn’t be demand for anywhere close to 500,000 Teslas by 2020. Furthermore, he noted:

“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…. In our view, the Gigafactory investment will translate to even more capital intensity and add further pressure to margins and returns.”

Lindstrom’s Follow-up Points

Now, Lindstrom then went further and examined how much growth Tesla really needs to see in order to compete with leading competitors (or the closest thing to them) — Mercedes and BMW.

If we assume that Tesla can meet the bullish forecast for 400,000 cars by 2020, that would put it at number 33 in a world ranking of auto production by manufacture for 2012 according to The International Organization of Motor Vehicle Manufacturers, or OICA.

1.1 million units would place Tesla in 20th place, several slots below Daimler AG (OTCPK:DDAIF) (Mercedes) at #12 and BMW at #14, which I believe are Tesla’s main competition.

Unlike Tesla, BMW is already building over two million autos a year at a profit, while paying a 3% dividend.

According to Bloomberg, BMW has a market cap of 53,917 million euros (about US$74B), with a 2.98% dividend yield and a PEG ratio of 2.5.

If you believe Tesla can grow earnings by 52% a year for five years, then you can make a case based on PEG that it will grow into its current valuation and it would look cheap compared to BMW if it could pay a 3% dividend. Growing earnings at over 50% a year for five years is difficult, especially when the competition is so large.

Indeed, as much as I think Tesla can disrupt the auto industry, that’s essentially betting that almost everything goes right, which is a risky bet. I think I’d take the stance Elon took last year: Tesla investors are putting a lot of faith into Tesla achieving some very considerable targets.

Do I think Tesla won’t achieve them? No, I think Tesla will. But I also wouldn’t put my money on a stock based on such large growth that is based on so many difficult things going well. As much as I am a Tesla fanboy and think I will buy a Tesla someday, I don’t think I could justify such assumptions when there are so many other, safer buys out there.

Other Comments

Before closing, there were a handful of comments under the article that I wanted to highlight. Here’s a big one from user 6012571:

MY roommate’s boyfriend works at TSLA and he’s been selling his shares since they hit $120. Since they have restrictions on the stock they have to wait unitl the restictions come off. He, and I, and her, laugh all the way to the bank.. I bought at $40 and sold out at $180 with no regrets. He has told me all of the other employees dump the stock the first chance they get and are buying condos, houses, ect… NOT TESLA CARS. WALL ST can be so dumb.

Here’s a simple but elegant one, from NetworkBob:

A $30B market cap for a company that produces less than 40K automotive units annually is a stretch.

Here’s on on the other side, from Ford Prefect 1969:

This whole Ford is better than Tesla conversation brings to mind a funny story told by Steve Jobs around the time of his return to Apple.

It went something like this:

“So they told me Apple is like a ship with a hole in the bottom, and they asked me…. could I help to steer it in the right direction”

Tesla is the hole in the bottom of the ship called the auto industry. It really does not matter how big the industry players currently are or what direction they turn in, until such a time as they can address the fact that Tesla is producing vehicles that are far more advanced and desirable and far better value for money in their class, Tesla will continue to flood the ship.

It is not a question of what Tesla is worth. The burden of proof now rests on whether F, GM, TM, etc will be worth anything at all a decade hence.

One thing is for sure, TSLA will be worth a lot more in 10 years time than it is now. The same cannot be said for any other member of the balance of the auto industry.

Another from him:

Not sure that it matters that Tesla does not currently compete with Ford.

It will do, imminently in auto industry timescales, and Ford is nowhere near ready for that.

This: http://bit.ly/1gAn52z

Is a screen grab from a Tesla recruitment video hosted on Vimeo.

It is not a Model S and it fits the description of the Model E. It probably is an early CAD rendering of it.

This thing at $35K with free long distance travel, no pain at the pump and not for profit servicing I think will more than challenge anything from Ford that starts with a base price in excess of $20K and make a laughing stock of the C-Max, Lincoln hybrids and Fusion energi products at around the same sticker price.

It will take a while for Tesla to gain mega scale production, but I cannot see anything on the horizon to prevent Tesla behaving as a monopoly and absorbing market share absolutely as fast as practicality and cash flows permit. That is another problem for the current crop of big auto. Tesla’s business model allows it to expand cash flow positive in excess of 50% annually and I believe 100% without burning any cash.

Evidently it also has as much access to capital as it wants. $2bn is nothing, I was amazed that it asked for so little. I am sure $5 bn would have been no problem either. Think on that when in less than 2 years Tesla reports that it has a million reservations for the car in the picture above.

That is the risk Ford and others are facing, the auto market is Tesla’s playground now. That much is clear for the sake of looking. Relative production volumes at the dawn of massive change are a smoke screen.

DeepValueLover gets to the heart of the matter, imho:

If Tesla’s current price is based on the rate of growth then why is the price 2.56 higher than that pace of growth?

…and that is with Tesla growing earnings at 100% per year.

The stock price is ~2x the value of future growth.

There will be a SEVERE pullback…probably this year.

But I’ll also at Ford Prefect 1969‘s response to that comment:

@DeepValueLover

I think the starry eyed shorts will be SEVERLEY disappointed.

There may well be a gradual tapering of earnings multiples over a period of years. Set against that is the fact that the forward looking statements of this company are ridiculously conservative.

The big money knows it, that $2bn of bonds targeting $360 is big money.

Closing Look At Tesla & A Few Stocks

Here are the market caps for a handful of auto companies as I write this (all values are in USD):

And here are 2013 vehicle sales for those companies (in millions) as well as a 500,000 estimate for Tesla in 2020: