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Are Tesla's shares worth US$90 or US$780? Wall Street can't decide

Bloomberg • 9 min read
Are Tesla's shares worth US$90 or US$780? Wall Street can't decide
It all boils down to these questions: What type of company is Tesla exactly? And how should the stock be valued?
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For all the headline-making drama surrounding Elon Musk and his brainchild Tesla Inc., investors were rewarded handsomely for their patience this year.

Now that the company is maturing into blue-chip status with its addition to the S&P 500 Index this month, what happens next may boil down to some simple questions: What type of company is Tesla exactly? And how should the stock be valued? Wall Street’s answers, however, are wildly different -- Goldman Sachs has a price target of US$780 ($1,042.43), while JPMorgan Chase’s is US$90.

“It’s whatever people want to believe Elon Musk is touting,” hedge fund manager Jim Chanos told Bloomberg TV earlier this month.

Of course, investors who have bought into Musk’s ideas have done a lot better with the stock than Chanos, who said he recently reduced the size of a “painful” short position in Tesla that he’s held for five years at his firm Kynikos Associates. The electric vehicle maker has now reported profits for five straight quarters, accompanied by a more than seven-fold increase in its share price this year and a whopping return of almost 18,000% since the 2010 initial public offering.

Investors who believed in Musk’s vision to transform the century-old automobile industry and stuck with it through the years had to look past production troubles, delivery missteps, mounting losses, volatile stock moves and an erratic chief executive prone to land himself in trouble with tweets.

Yet as the scrutiny intensifies on the company that will command one of the top weightings in the S&P 500, investors are struggling to make sense of this auto manufacturer that is trading far above the lofty valuations typically enjoyed only by technology companies with vastly different business models. Tesla’s shares currently trade at nearly 1,000 times earnings, compared with a paltry 14 times for General Motors Co. and 53 times for the NYSE FANG+ Index.

Therein lies the dilemma. Is Tesla an automaker? Or is it a technology company? Or is it some sort of an amalgamation of both? The company plans to deliver about half a million cars this year, a 36% jump over last year’s levels, but slower than the 50% increase it achieved in 2019. Wall Street analysts estimate revenue will grow 26% this year, accelerate further in 2021, and then taper off into 2022. Estimates for earnings in 2020 and 2021 have barely budged over the past two years.

The most bullish analysts and investors, however, say that selling cars is only one of Tesla’s many potential endeavours. Active exchange-traded fund manager Ark Investment Management, a shareholder and one of the most ardent bulls on the stock, estimates the company’s share price will reach US$7,000 by 2024. That calculation assumes Tesla will not only make electric cars much more efficiently than traditional ones with internal combustion engines, but also operate a fully autonomous taxi network.

Right now, Tesla is not only the biggest automaker in the world by market value, it is worth more than GM, Ford Motor Co., Toyota Motor Corp., Volkswagen AG and BMW AG combined, which leads to the question: How exactly are investors valuing this company?

Musk himself said back in May that Tesla’s share price was “too high,” and earlier this month warned employees that the stock can “get crushed like a souffle under a sledgehammer” if investors at any point conclude that it cannot achieve the profits they are expecting it to deliver in the future. Tesla did not respond to a request to comment for this article.

Below are the edited excerpts from interviews with two major Wall Street analysts on how they are valuing the company. Adam Jonas of Morgan Stanley has the equivalent of a buy rating on the stock and a price target of US$540 -- almost US$70 below its current price. Meanwhile, Ryan Brinkman of JPMorgan rates it the equivalent of a sell and has a US$90 target.

Adam Jonas, analyst at Morgan Stanley

  • How do you view Tesla’s present market capitalization and how are you valuing the stock?

    • Tesla is a car company in the way Apple is a phone company. As the car becomes connected to the internet, that opens up a lot of other addressable markets that historically were never available to car companies, and even today -- from the way most car companies design their cars -- those markets are still not available to them. Tesla is moving people away from valuing and analyzing the company by just using the number of units sold and the price of the car, and bringing into account the installed user base and the software and content services offered to those users. In the process, it takes you away from comparing Tesla to car companies and should rather be compared to software-as-a-service companies.
    • Out of our US$540 price target, US$254 is attributed to the core auto manufacturing business, US$154 to the network-services business opportunity, US$58 to the potential of becoming a supplier of batteries and powertrain to third parties, US$38 to the mobility and ride-sharing business opportunity and US$25 to the insurance and energy business.

  • By order of magnitude, it largely deserves its valuation. But with a story moving as fast as Tesla and with a scarcity for investors to otherwise express that view, the stock will certainly trade above any analyst or investor’s fair value estimate.
  • Apple used to be seen as expensive at 15 times P/E and now is seen as quite cheap at 30 times P/E. That happens when you change the narrative, and change your business model from selling devices and hardware to also include the stickiness of the platform.

  • It is not comparable to automotive companies. Think of Tesla as an ESG or climate-change innovation ETF. For its energy business we look at the solar companies, for the car business you can look at Apple when it was growing really fast or the valuation of the SPACs, and for the services business we looked at SaaS companies.

Ryan Brinkman, analyst at JPMorgan

  • How do you view Tesla as a company and how are you valuing the stock?
    • At the end of the day, investments are worth the discounted value of their future cash flow. When we tried to reverse engineer Tesla’s current market value to go see what assumptions might be embedded in it, we found it requires revenue and margin that are really difficult to envision. Tesla’s valuation now is nearly two times that of Toyota and Volkswagen combined, but those two companies together sold 22 million vehicles last year. They generated US$40 billion of earnings before interest and taxes. So is Tesla going to grow to approximate something like two times the earnings of the two largest automakers in the world today combined? ... Something like this could actually be embedded in the shares.
    • We have a US$90 price target on the stock and that still implies a market value for Tesla that is bigger than GM. It is only a low price target compared to the current share price.
    • GM today sells 6 million vehicles and Tesla sells 500,000. Yet the perception is that I have such a dour view on the company. I think I have a dour view on Tesla only relative to the super enthusiastic view that the market has about the company.
  • Do you think Tesla deserves its current valuation or has the stock run up too fast too soon?
    • The stock has clearly run up too fast too soon. I think this company is going to be hugely bigger in the future, but they will need to be growing even so much more to justify the current share price.
    • Investors should be braced for share-price depreciation rather than appreciation, and that can happen despite the company getting much larger and much more profitable. Because it is not a question of whether they can double or triple, as they need to do much more than that.
  • What is your advice to investors who are wondering whether to buy Tesla ahead of the S&P 500 inclusion?
    • I would ask them to take a view on the fundamentals by working back from the current share price, and to try to think about what future unit volume, revenue, and margin estimates may be embedded in the stock price already, and to really ask themselves if they find those assumptions reasonable and probable. If they do find them probable, then they can buy at these levels. But perhaps by first doing the analysis, they may come to believe, as do I, that the stock’s valuation has become detached from the fundamentals. At a minimum, potential new investors in Tesla should understand that there is a speculative fervor at the moment and that the stock is heavily influenced by emotion and psychology and so bound to be very volatile.
  • Which company or companies can be a good comparison for Tesla?
    • In terms of what this company may look like in the future, I see it primarily as an automaker, although one which derives a minority of its revenue from additional potentially faster growing end-markets. From an automotive end-market perspective, it may possibly approximate in the coming decade the size and profitability of a Daimler or BMW. That doesn’t mean it should trade at Daimler or BMW multiples right now, of course, given its faster growth and additional end-market optionality.

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