Tesla: Soaring On Momentum, But Still Risky

Sep. 5.14 | About: Tesla Motors (TSLA)

Summary

Tesla hit a new all-time high Tuesday after Stifel Nicolaus set a $400 price target on the company.

However, despite strong efforts towards expansion and decent fundamentals, Tesla is facing weak demand.

Telsa may eventually move past these issues but wait on opening a long position until improvements in demand are clear.

Tesla (NASDAQ:TSLA) soared to a new all-time high of $284.89 Tuesday after Stifel Nicolaus set a $400 price target for the company. However, not everyone is as bullish on Tesla. According to CNBC, the average price target for Tesla is just $259.62, including Albertine's $400 price target.

INVESTMENT THESIS

Tesla has a lot to overcome if the company is going to warrant a $400 share price. Demand is lacking and finding a place to charge up isn't as easy as filling up a fuel tank. Tesla is taking some moves to improve that demand and has some strong fundamentals but that doesn't mean that taking a position in the electric car company isn't a risk.

ELECTRIC CAR MARKET

Demand for electric cars has been disappointing. Last year, less than 100,000 electric vehicles were sold in the U.S., which is a rather small percentage given that 15.6 million vehicles were sold in the U.S. during the same period - and that demand shows in the number of charging stations. According to the U.S. Department of Energy's Alternative Fuels Data Center, there are only 8,476 public electric car charging stations in the U.S. In comparison, there are more than 121,000 gas stations in the U.S.

"Despite a booming U.S. auto market, sales of electric and hybrid cars have stalled this year, capturing 3.6% of the market through August, slightly down from last year's 3.7% share, says research firm Edmunds.com," reports the Wall Street Journal. "The leveling off comes as surprise. Many auto industry executives and analysts predicted that hybrid and electric car sales would continue to grow incrementally as car makers expanded new offerings and public awareness increased." And, Edmunds says a late year surge seems unlikely. Sales of vehicles tend to level off after the summer months anyway. Moreover, "for many major car makers, sales volumes are declining as gas prices stabilize and more U.S. buyers return to buying large cars and sport-utility vehicles."

"I thought things would be much further along than they are," said Tesla CEO Elon Musk. "We unveiled the roadster in 2007 with a 250-mile battery range and it has been seven years, and there is no other electric car in production with that range level. That's not great."

In response, Tesla has taken some important moves in bolstering the electric car market - namely opening up its patents on electric vehicle technology. These patents include Tesla's supercharger technology, which allows users to charge half the car's battery life in just 20 minutes, but also extends to include all of Tesla's future patents.

Musk's end game is to improve development by its competitors so that more electric cars will hit the market and the demand for cars using electric technology will rise in turn. "We believe that Tesla, other companies making electric cars, and the world would all benefit from a common, rapidly-evolving technology platform," said Tesla CEO Elon Musk. "It doesn't really harm Tesla but helps the industry," said Musk, "and I think actually it will help Tesla, mostly with respect to attracting and motivating the world's best technical talent."

STRATEGIC EXPANSION

The strategy is strong. Electric car technology, especially proprietary technology, means that fewer people are trained to build or service the vehicles - opening the patents up could help with that reality.

Tesla has been readying for eventual demand and building its production capacity. Its current 800-per-week production rate is set to reach 1,000-per-week by the end of 2014, and as much as 2,000-per-week by the end of 2015. There is also its planned Gigafactory. Tesla, with its partners, is investing around $4-$5 billion in building the factory (Tesla is directly investing $2 billion), which will produce 500,000 electric car batteries per year - more than all of 2013's total global electric car battery production, the bulk of which were sold in Asia.

It is a gamble that has prompted some people, like Phil Gott, senior director of long-range planning at IHS Automotive, to call the venture "probably premature". Gott explained his comment, "We're not at the point where we know which chemistry will be a winner. If it were me, I would wait a while longer until the direction is clear. There are a lot of bets on solid state or thin-film batteries such as Sakti3, which use a totally different form of battery chemistry. Toyota recently announced that is the way they will go. If that is the case, it will totally obsolete any traditional chemistry plants."

THE CASE FOR TESLA

Stifel Nicolaus analyst James Albertine explained his bullish outlook by saying, "My argument is that Tesla's really carved a niche... and the competition is years away. We think they can defend themselves for the better part of at least two or three years."

"TSLA appears to have carved out a defensible niche in the global market for luxury electric vehicles, and based on our recent tour of the Fremont, CA, facility, a sizable head start with respect to production," continued Albertine. "The key risk remains demand, in our view, but given (A) competitors' apparent unwillingness to fully invest (resources/managerial autonomy), and (B) TSLA's brand resilience in spite of high-profile accidents/fires/recalls, it seems demand deceleration may be a late decade call at the earliest." Moreover, "given the pace at which production is ramping and the fact (that) Tesla has only recently entered the EU and Asian markets, we are incrementally confident in management's ability to leverage its brand advantage globally over the next two to three years."

In addition, the positive sentiment surrounding Tesla is compelling. "While there are no fewer than a half-a-dozen other key concerns we share with industry purists, the reality is, these issues simply do not matter with respect to Tesla's stock," says Albertine. "Tesla sentiment is like a freight train, in our view, benefiting from a well-manicured growth story that has caught the eye of a much broader investor base relative to most auto stocks. Tesla has positioned itself as the smart vehicle of the future, with a glimpse into smart purchasing and smart infrastructure."

But that's not to say Tesla's only advantages are its early movement in the luxury electric vehicle niche and investor momentum. The company has decent fundamentals. They may not be enough to justify a position in a well-established company but Tesla is growing. Just look at its revenue. Compared to the same quarter prior, the company's sales leaped almost 90% - versus an industry average of only 11.5%. While this growth hasn't really trickled down to Tesla's bottom line - its earnings per share is still in the red - the company is expected to post strong EPS going forward. According to consensus estimates, its earnings per share is expected to be 9 cents per share for 2014, rising to $2.15 per share for 2015, $3.39 for 2016, and $6.17 for 2017.

Tesla has also enjoyed strong stock performance - its share price has climbed over 66% over the past 52 weeks versus 21% for the S&P 500 - and its gross profit margin of 34.8% is an improvement over the same period last year.

TAKEAWAY

Tesla is an early mover in the luxury electric car market but lacks current demand. While there is great room for growth going forward and Tesla has been working to build a fundamentally strong company, expecting a $400 price target before an evidence of marketable demand is risky. Wait on opening a position until improvements in demand are clear.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.