If you’re like me, you’ve probably seen more calls on Tesla Inc. than any other stock on Wall Street.
And with shares TSLA, +2.69% slumping nearly 30% year-to-date to its lowest point in two years while the S&P 500 SPX, +0.11% has climbed 17% higher since Jan. 1, those Tesla headlines are seemingly more frequent than ever before.
On one side, there are bears like the analysts at Cowen who just hung a $160 target on the stock after the company’s recent challenges — more than 30% downside from here. On the other, there are bulls like Berenberg that set a $500 target in 2018 — more than double current prices — with analysts calling the idea of any competition to Tesla a “myth.”
Those two calls just about sum it up: Either Elon Musk & Co. are all frauds, or Tesla is a once-in-a-lifetime investment opportunity.
In reality, both extremes are probably way off.
Regarding the bears, it’s amusing to see how many people insist on analyzing Tesla through old-school methods of valuation. It’s like they’ve already forgotten how Amazon.com Inc. AMZN, -0.63% raced up from $50 a share in 2008 to $500 a share in 2015 despite a lack of earnings per share. There is assuredly risk when Wall Street places a big premium on future growth potential, but Tesla is hardly the first disruptive stock that doesn’t fit into traditional analysis models.
Read Michael Brush: Tesla bears are now making crazy claims, short-circuiting their cause
In the bullish camp, it’s equally ridiculous to see people get worked up when discussing how awesome Tesla’s cars are, how cool Tesla CEO Elon Musk is and how in 10 years this company will have single-handedly transformed the global economy — and heck, maybe started an economy on the moon, too. It’s all well and good to be an optimist, but any decent investor knows that getting emotional about a particular product or stock is a surefire way to make mistakes with your money.
So today, I’d like to take a novel concept to Tesla and discuss the stock in more rational terms.
And when you look beyond the day-to-day volatility based on sentiment, it’s actually quite easy to why Tesla is valued where it’s at — and why 2019 may continue to be challenging for the auto maker.
First, forget profits and current sales
Sure, Tesla posted a wider-than-expected loss in the first quarter. But as mentioned before, a host of tech stocks like Amazon have proven that demanding consistent earnings is simply missing the point. Cash burn is a simple reality of high-growth stocks, from cybersecurity to biotechnology, and a fixation on current profits (or losses) is misguided.
Even worse are the market-value comparisons or revenue modeling vs. traditional auto makers like Ford Motor F, -0.86% Beyond the simple truth that Tesla is positioning itself as so much more than a car company after the formal tie-in of Solar City in 2016 and continued research into broad applications of battery technology, you don’t even have to look outside the auto sector to see how wrongheaded this thinking is.
Exhibit A: Ferrari N.V. RACE, +0.09% shipped a meager 9,251 vehicles in 2018 but is still valued at some $30 billion — a staggering $3 million per car — while Ford is hovering around $40 billion in market capitalization despite 2018 output of roughly 6 million vehicles globally, or about $6,700 per car.
Just try making an argument for Ford stock based on the fact it sells more Fusion sedans in a month than Ferrari sells from its entire line in a year and you’ll see how absurd it is to play this per-car valuation game.
As I’ll show in a bit, there are plenty of ways to make a rational and bearish case against Tesla. But market cap and per-vehicle valuation measures simply aren’t part of the equation.
Instead, focus on future sales
Since Tesla is a fast-growing innovator with a premium brand and ambitious plans for growth, current production or current profits are simply not rational valuation measures. Instead, investors should look at where they assume Tesla will be in five years’ time and then act accordingly.
One data point: Musk has predicted more than 1 million Tesla vehicles will be produced by the end of 2021, with an annual target of 3 million by the end of 2023.
Sound crazy? Maybe… but maybe not.
Bloomberg has developed its own Model 3 Tracker based on VIN data and currently estimates an annual run-rate of about 300,000 vehicles at present, meaning production will have to grow threefold in two years. Yet another data point to consider is that at the end of 2018, customer deposits were around $800 million. Presuming the typical deposit is about $3,000 per vehicle, that means there are customer expectations of 270,000 or so vehicles to be delivered in the near future.
Considering production has already roughly tripled from 120,000 vehicles in 2017, it’s an ambitious but not an altogether impossible task for Tesla’s output to hit 3 million cars in four years’ time.
As with so many things on Wall Street, there is no way of knowing for sure where Tesla will wind up. But if you’re looking at Tesla, it’s worth seriously engaging with the question of just how many vehicles it will be cranking out in 2021 and beyond.
Now, look back to 2016
Whatever your estimate of future sales, it’s hard to rationally argue that Tesla production will be flat or lower. Tesla has admittedly seen production setbacks in the past and Musk is certainly no choirboy, but it would take a black-swan event or scandal to derail the auto maker at this point.
So those who claim Tesla is “priced for perfection” are simply asserting that the company’s growth path is deeply ingrained in the current stock price and there’s no upside from here.
If you look back to the stock’s performance in 2016, that argument seems to hold up.
Three years ago, Tesla made a bold promise of producing 500,000 vehicles by 2018. And that summer, immediately after this prediction, Tesla stock traded around $200 a share and as low as $180 around Thanksgiving 2016.
Even if you believe Tesla will eventually get to 500,000 vehicles or more in the next year or so, share price history shows it’s not irrational to value the stock below $200 even if you’re forecasting modest growth.
The flip side of this is true, of course. If you’re a Tesla bull who believes Elon Musk’s prediction of 1 million cars by 2021, then it’s not irrational to argue sales should be double where they were when the production target was 500,000 in 2016. After all, Tesla has plenty more going on than the Model 3 to drive future growth.
In this case, you could make the argument for a $400 share price — an ambitious target, but one that is grounded in an ambitious growth path.
But personally, I think it’s awfully pie-in-the-sky to expect Tesla to hit that 1 million target. Elon Musk has overpromised and underdelivered frequently in the past, competition is heating up and it’s much harder to double production from a large base than from the comparatively smaller one back in 2016.
There’s no way of knowing just how Tesla’s production will ramp, of course, unless you own a crystal ball. But if you’re interested in rationally valuing Tesla instead of just engaging in emotional arguments, this kind of math should provide a good road map to how shares might be valued.
Jeff Reeves writes about investing for MarketWatch. He holds no investments in any companies mentioned in this article.
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