Why Tesla share price has analysts divided

If the stock market is a race, US electric vehicle manufacturer Tesla Motors Inc would be the car you want to bet on, at least based on current market trend.

The company saw share price rally as much as five percent on Wednesday to hit an all-time high of US$594.50, breaking the US$100 billion barrier in the process.

With this latest bull run, Tesla becomes just the second automotive company in the US – after Japanese carmaker Toyota Motor Corp – to achieve a nine-digit market capitalisation.

But beneath face value, is everything truly as rosy as it seems?

Goodbye yellow brick road?

Despite the seemingly never-ending yellow brick road, analysts are split on which corner share price could take next.

The most bearish of them is Toni Sacconaghi from Alliance Bernstein, who gave a price target of US$325 a day before this current price hike.

‘We acknowledge it is difficult to call the top on a rocket ship... we note expectations for TSLA appear to be rising materially, while we remain cautious,’ he wrote in a note.

Analysing large-cap stocks worth over US$20 billion from the last 40 years, Sacconaghi wrote that large-caps that doubled in value in six months ‘subsequently saw a forward six-month absolute return of just 2.6%’, indicating a degree of overvaluation.

The investment research firm also examined the ‘doubling’ phenomenon in both the technology and automotive sectors – two categories that the company has been parked under.

It found that while doublings took place most in the tech industry – accounting for over 50% of all doubling cases since 1980, it is much less common for the auto sector to experience such an uptrend.

In fact, auto stock doublings have only happened five times in the past four decades, of which two were from Tesla.

And while high-flying stocks tended to ‘track’ upward revenue revisions in the six months post-doubling – as in Tesla’s own case – Sacconaghi maintains that ‘near-term risk/ reward is skewed to the downside for Tesla’.

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Opposite side of the street… US$800 target

On the opposite side of the road is New Street Research, which proposed a new price target of US$800 by 2021, up from US$530 previously.

That’s because Tesla has been able to realise all the expectations of lead analyst Pierre Ferragu, including the Model 3’s command of premium vehicle market share, and a 40% improvement in cost and performance.

The firm expects Tesla to sell two to three million cars every year after 2025 ‘at industry leading margins’, which would justify an eventual market capitalisation of US$230 to US$350 billion. This would work out to roughly US$1,100 to US1,700 per share.

While Ferragu’s long-term view is decisively bullish, he is more hesitant about calling a near-term price.

‘The stock will remain volatile, as the spread between bull and bear cases remains wide, and God only knows what the next controversy will be,’ he wrote. ‘Short interest remains elevated, though, expectations for 2020 seem low, and we expect a strong free cash flow beat next week.’

Tesla is announcing its Q4 2019 earnings – including guidance on FY2020 – on 29 January.

A quick review of the surge

Tesla stock has been the main story of the US equity market in recent months, as shares skyrocketed 125% the last three months alone.

As previously reported, Tesla’s upward price momentum was likely a combination of two factors: the opening of a new factory in Shanghai and the local roll-out of its first, heavily-subsidised Tesla Model 3 cars earlier this month.

The EV company’s reduced pricing strategy for the Model 3 has prompted analysts to go and back forth on its true market value based on the China market’s yet-to-be-proven profitability.

That’s because Tesla is ‘obviously’ playing a volume game in China, rather than one focused on margins, ‘given its frequent price change to stimulate demand’, according to JL Warren analysts.

‘Since locally sourced components are limited at this point and batteries are still imported from the US, the price cut to drive demand in China market will negatively impact profit,” the China-focused US equity research firm wrote in a note.

With Tesla’s fourth quarter earnings coming out next week, analysts and investors should get a better gauge of how effective these strategies are.

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