Why Tesla Shares Are More Likely to Hit $7 Rather Than $70
Last week there was an analyst at Morgan Stanley who put out a report with a $70 price target on Tesla (NASDAQ:TSLA) shares, even though they had recently been languishing in the low $20's. You can read more about this extremely bullish price target here.
I would say this is putting the cart before the horse. Do you really need to put a $70 price target on a stock trading for about $23? These shares haven't even been able to sustain the $30 level for too long and before this analyst pushed up the stock with this report, the shares looked as if they wanted to go back to the teens. This kind of over the top price target makes me wonder - what is the motivation behind this report?
Was this analyst perhaps seeking to make a name for himself? If you want attention grabbing headlines, you can't merely use reasonable projections or price targets. You certainly aren't going to make a name for yourself that way. One man at Morgan Stanley wrote his view of the world in terms of how Tesla will prosper, and at least temporarily, this added about $400 million in market cap to the shares. It would be nice if making money or creating wealth was only that easy.
Several months ago, the same analyst gave Ford (NYSE:F) a price target of $23, and you can still buy Ford all day long lately for $14 to $15. You can read about his upbeat report on Ford, which was made last year, here. You would think the analyst would be a little more cautious with his auto sector price targets since the Ford target is still nowhere in sight.
In my opinion, aside from the possible motive of wanting to seek publicity with this report, the other motive could be financial. I would not be surprised to see a secondary offering soon (can you imagine, it might even be underwritten by Morgan Stanley). Tesla shares looked like they were close to going back in the teens before the upgrade, even though the market has been surging higher. This upgrade certainly gave the shares at least a short term boost, which could help if Tesla announces a capital raise in the near future. I know it's crazy for me to think that Wall Street would work like this, but I do.
Last week there was an interesting article by Rocco Pendola making comparisons between Apple (NASDAQ:AAPL) and Tesla, which you can read here. I respect what Rocco Pendola wrote, and he makes some excellent points, but I am going to have to counter a few of them. The article even goes to the point of comparing the MacBook Pro to the Tesla Roadster. It also talks about how Tesla's showrooms even have the look and feel of an Apple store rather than a traditional dealership.
The article says that Tesla "only needs to be the BMW, Mercedes, or the Apple of EV carmakers." As if that is some small feat, and why wouldn't BMW or Mercedes actually be the BMW or Mercedes of electric vehicles? These kinds of comparisons are lofty and have not yet been earned. There is nothing to stop BMW or Mercedes from making electric vehicles.
Tesla is no Apple and the chances of it ever being as successful as Apple are slim in my opinion. The article finishes by talking about how you might miss out on great investments if you "worry about high P/Es or, in this case, lack of profitability and the uncertainty of the consumer's willingness to move from the status quo." That is the real problem, which is that in order to make a strong case for investing in Tesla, some people need to:
1. Compare it to Apple.
2. Say it only needs to be the BMW or Mercedes of the electric vehicle market.
3. Convince yourself that this time you don't have to "worry about high P/Es or, in this case, lack of profitability and the uncertainty of the consumer's willingness to move from the status quo."
That all sounds very speculative to me, and there are numerous pitfalls before meeting those and many other goals needed to be the next Apple. I also want to point out that you did not have to be one of the first investors in Apple to have made a fortune with Apple stock. In addition, the article and certain others want to call Tesla a technology company. Again, what is the motivation here? It's probably because there are scores of technology companies that have made investors extremely rich. The P/E ratios for tech companies are also much higher than for automakers. Why can't some people just call Tesla a car maker?
Is it because there aren't scores of automakers who made their investors rich in the past 10 or 20 years? How are people who bought Ford, GM, or Chrysler shares 25 years ago doing? If I was making a bullish case for Tesla, I would want to compare it to Apple rather than any automaker as well. Let's face it, the business of making cars is very tough, highly competitive and has not been very rewarding for investors. In many cases it's been a terrible financial decision to own shares in automakers. In terms of valuation, of course it would be nice for Tesla to have the P/E ratio of a tech company at 15+ times earnings if they become profitable rather than every other U.S. automaker, trading for about 7 times earnings.
Tesla could be the Apple of the car world if it had about $30 billion in cash, and was making billions per year in profits. It would also be like Apple if it sold a product that appealed to people of all ages and all income levels. I know countless people who own or want to buy Apple products and I know nobody who wants a Tesla or owns one now. Elon Musk is an incredible entrepreneur, and I admire him and the Tesla roadster. However, you have to be able to separate those beliefs with what makes a great investment.
I think the risks and challenges are being greatly underestimated by current Tesla investors. The very fact so many people believe that Tesla has the same potential as Apple and that these two companies are frequently talked about and compared in the same light makes me believe some people are not being realistic. I would like to point out that I haven't seen Apple people trying to compare Apple to Tesla, but I do see Tesla fans and shareholders trying to compare Tesla to Apple.
I'd like to compare all of my investments to Apple as well. After all, Apple is one of the biggest global success stories and one of the most valuable corporations in the world right now. Comparing any company to Apple is likely to lead to disappointment. Let's also consider that it took decades for Apple to get where it is right now. The world is full of companies that have very cool products, but cool products don't always translate into financial prosperity for the company much less the shareholders.
Do I really think Tesla will hit $7? Hopefully not, and it would probably take some major error by Tesla for that to happen, but I believe it is far more likely than $70 is in the next couple years. The world is full of IPOs that went bust or traded significantly below their IPO price even if they later became successful. While I am not hoping or calling for these shares to hit $7, I would be confident in saying I believe they will drop back to at least around their IPO price at some point. I expect that the honeymoon phase for investors will get rocky at some point, when and if Tesla needs to raise capital, and or fails to meet sales and financial goals.
This honeymoon is possible now because it's easier to talk about rosy sales and profit goals as the Morgan Stanley analyst does, rather than achieve them. Soon, I believe this "grace period" will end, and Tesla will have to start delivering on all these goals. When the grace period ends, and investors get back to concerning themselves with things like valuation, profits, etc., it won't be so easy to make the type of projections that are being made some investors and analysts right now.
I want to state once more, I admire Elon Musk and Tesla. I am not short Tesla Motors and never have been. I truly hope Tesla is successful as the U.S. needs more entrepreneurs like Elon Musk. However, it's important to remember: even with great companies that turn out to be incredible investments, you don't have to be the first one to own the shares. There were plenty of opportunities to buy shares in Google (NASDAQ:GOOG), Baidu (NASDAQ:BIDU), Apple, and others often at prices that were below the IPO price, and you still could profit handsomely. I believe there is a very good chance that a much better buying opportunity will come if you want to own this stock.
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I am not a registered investment advisor and do not provide specific investment advice. The information contained herein is for informational purposes only.