Just days before Goldman Sachs came out with their $84 per share average price target, 34% decrease from yesterday's $127 price close, according to this news release, I wrote an article about the "sobering future" of Tesla. This SeekingAlpha article laid out a bearish outlook, but pegged one key point that Goldman has laid out, Tesla (TSLA) will no longer be treated as a growth stock. Here is what Investopedia.com defines a growth stock as:
A growth stock usually does not pay a dividend, as the company would prefer to reinvest retained earnings in capital projects. Most technology companies are growth stocks.
Note that a growth company's stock is not always classified as growth stock. In fact, a growth company's stock is often overvalued.
The key word in that definition is "overvalued". That is the keyword for Tesla because there are a million people with an opinion on this revolutionary car company and the valuation of it is all over the board. When a company is losing money (negative EPS) and is at above $120 a share, then we know that there are a lot of people valuing the company with a very great future earnings potential. But there are many unknowns in the case of Tesla in terms of sales model, margins, when the gen 3 model comes out and R&D spend to get it, competition and many other factors that led people to value it from $40 to $200 a share.
It is my opinion that Goldman Sachs (GS) took these things into account when they laid out their three scenarios and took an average of the three. With recent announcements of BMW coming out with their electric I-series lineup and investing into charging stations and loaners like Tesla did, according to this article, Goldman might have realized that Tesla is going to have heavy competition. With this realization it also made Tesla become a legitimate company (non startup) and in my opinion let them now take Tesla out of "growth stock" valuation and pegged them with a realistic P/E of 20. This is still on the high end as Ford (F) is around a P/E of 11, but Tesla is still "sexy" and "exciting" to a lot of investors so they might be justified to give a P/E of 20 to an otherwise boring automotive industry.
To conclude, investors need to watch Q2 earnings very closely. There are several key statistics Tesla will need to hit in order to deserve your money. They need to hit the high gross margins this quarter (high teens) and still maintain a high delivery rate. They will also need to talk about the company's demand for vehicles. They have currently discussed shipments and guidance for full year shipments, but Tesla needs to give some kind of outlook for the demand and bookings of their vehicles. This MotorTrend article pointed out a sales decrease, so they will have to back up that demand is still high and that they are not seeing a big decline after the initial rush to purchase the new cool car on the block. They will also have to let the public know about their upcoming vehicles. They will need to address the demand for the Model X and how far along the Gen 3 model is. They will need to address the lithium battery market, the pricing for this crucial component can make or break Tesla and will also give guidance on what the Gen 3 model will be priced at. If Tesla successfully addresses all of these key points, even Goldman can raise their price target. But in my opinion the big manufacturers have been planning for this and let Tesla create the hype for the electric vehicle before they come in and put out a fleet of electric models at different price levels and with a lot more options. If this is the case that occurs in several years, then Tesla might get bought out or be priced much lower than $84/share because the current demand for electric cars is very finite and there are a lot of manufacturers all wanting a piece of that low margin pie.