Wall Street Tesla bears have gotten clobbered -- but the bulls still have to deal with some big questions

  • Tesla has consistently beaten the markets for years, but on Wall Street, there are still plenty of bears to go along with the bulls.
  • The bulls have been winning.
  • But Tesla is still up against money-losing fundamentals.

If you had bought Tesla stock right after the company’s 2010 IPO, you’d be sitting on a massive return, more than 1,000%.

But just because Tesla, now with a market capitalisation of about $US60 billion and a share price hovering around $US350, has rewarded investors, that doesn’t mean there isn’t a wide range of opinion about what CEO Elon Musk’s 14-year-old company should be worth.

Tesla bears and Tesla short-sellers have been pulverized over the carmaker’s publicly traded history. But their argument hasn’t lost its validity: Tesla, who has rarely posted profitable quarters, is currently incinerating cash at a furious rate. It has also struggled to launch its mass-market Model 3 vehicle, and has a balance sheet that’s loaded up with debt following a 2016 merger with SolarCity.

The bulls have been victorious, but some of them have tempered their enthusiasm in the face of Tesla’s tricky valuation. Others haven’t.

The most bullish major investment back is Nomura, with a price target of $US500 and a buy rating on Tesla. Bank of America is the most bearish, with a $US155 target and a sell rating.

Between those two, you have what we might call “qualified bulls,” such as Morgan Stanley’s Adam Jonas, with a $US379 target and a hold rating, as well as Rod Lache at Deutsche Bank, who is at $US365, also with a hold rating.

Then there’s Goldman Sachs, which is moderately bearish: a $US205 target price from David Tamberrino and a sell rating. At UBS, Colin Langan is at $US195 with a sell rating, and JP Morgan’s Ryan Brinkman is at $US185 with a sell.

The bulls have beaten the bears

Tesla Detroit sales vs market capAndy Kiersz/Business Insider

Tesla’s trading history suggests that the bulls are in a better position than the bears, and a thesis that emerged a few years ago has been undermined by the stock’s upward ascent in 2018. The idea was that when Tesla was trading below $US300, all the future upside was priced in and future investors would see far more modest returns than early bulls.

Obviously, the mega-returns haven’t been there since Tesla shares took off in 2013. But latecomers have until recently enjoyed returns that have beaten the broader markets by a long shot.

Unless something drastic happens with Tesla’s business – a substantial ongoing delay with the Model 3 launch, for example – the bears will be challenged in defending their positions. Sure, they have reason on their side: How can a company that’s never posted profits, is in deep debt, and has sold at best 100,000 vehicles per year have such a lofty valuation?

Profits versus losses

Tesla Model 3Hollis Johnson/Business InsiderThe all-important Tesla Model 3.

They can also point to General Motors, which also IPO’d in 2010, and since then has made $US70 billion and returned $US25 billion to shareholders in the form of dividends and share buybacks. GM, however, has posted just a 20% return and until recently had seen its stock stay flat for years (and a bump since late 2017 has largely been erased by declines since the beginning of 2018).

Tesla has managed to put together a decent core business with its Model S and Model X luxury electric vehicles. They sell for around $US100,000 on average and could have a profit margin of 20%. But Tesla likely can’t deliver more than 100,000 annually, so that business is tapped out for growth.

So the attention has shifted to the Model 3. For the bulls to be vindicated, Tesla has to be able to get a good margin on that car, as well. If the company can meet production goals in 2018 and 2019 and start to turn revenue into profits in a big way, then the most bullish bulls could be rewarded, and the more mellow bulls might have to shift into buying from holding mode.

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