At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
Wheeling and dealing on Wall Street
Investors often view "sell side" advice from Wall Street with skepticism, and rightly so. Judging from some of the stories we've been reading these past few years, these guys have lower ethical standards and less commitment to truth in advertising than your average used-lemon dealer. This morning, however, one analyst is clambering out on a limb and giving some advice you might want to heed.
Next week, Tesla Motors (Nasdaq: TSLA ) is scheduled to begin delivery of its second-ever electric car offering, the Model S sedan. At three basic price points, and offering three different battery sizes, the Model S is billed as having an all-electric driving "range" of either 160 miles, 230 miles, or a whopping 300 miles -- all without drinking a drop of gasoline. Numbers like these promise to put the circa-100-mile ranges of models from competing e-car makers Nissan and Ford (NYSE: F ) to shame (although General Motors (NYSE: GM ) will be quick to point out that the backup gasoline engine on its Chevy Volt can outlast even the longest-lived Model S variant).
To build enthusiasm for its new car, Tesla is preparing to kick off delivery season with a month-long cross-country test-driving tour, offering 5,000 buyers -- who've plunked down thousands of dollars each to reserve a car -- a chance to drive before they buy. But even before this event gets under way, analysts at Lazard Capital have come out and recommended buying Tesla stock.
It's a bold call, to be sure. But is it the right one?
Tesla's ticket to ride
At first glance, Lazard's bet on Tesla appears to have little chance of succeeding. On one hand, Tesla produces an emission-less vehicle, but it's also a profitless motor company at this point. True, too, based on trailing sales numbers, Lazard's projection of a $42 share price seems to imply an impossibly optimistic 24-times-sales valuation on the stock.
But as Tesla's defenders will tell you, the Model S is said to carry a price tag of anywhere from $57,400 (for the low-end 40 kWh, 160-mile-range variant) all the way up to $105,400 (for the 85 kWh, 300-mile jobbie). Take the midpoint of that price range and multiply by the 10,000 Model S reservations Tesla already has on the books, and you're looking at $814 million in guaranteed sales for the company.
Furthermore, Tesla tells us that half these sales are likely to close this year alone, and that its revamped NUMMI factory in California is capable of producing some 20,000 Model S's per year. Thus, Tesla is likely to book sales in excess of $400 million in 2012, then perhaps -- and depending on demand -- quickly quadruple that number in future years. If it takes Tesla a couple of years to scale up to a 20,000-car rate of production, well, this means that Tesla has two years of 100% annual sales growth ahead of it.
Tesla: Buy these numbers?
On one hand, therefore, Tesla's projected 7.7 price-to-sales ratio (based on this year's expected sales) might not sound like such a bad deal, even relative to the much lower 0.2 P/S ratio at GM, and the 0.3 P/S at Ford.
But on the other hand, if you check out some of Tesla's other competition -- and competition that's historically been much more tuned in to eco- and mpg-conscious consumers -- what you'll find is that Toyota Motor (NYSE: TM ) bears an also-small P/S ratio of 0.5, and Honda (NYSE: HMC ) costs only 0.6 times sales. And since both of these companies are coming off lean sale years themselves, Toyota is expected to grow its sales 200% this year, while Honda is looking forward to a 130%-plus sales acceleration in 2013.
Numbers like these threaten to deflate Tesla backers' argument that "Well, yes, we're expensive, but look how fast we're growing!" And sure, you can argue that Honda and Toyota are growing sales off a small base this year, and are unlikely to maintain such rapid growth in years to come. But then again, you can say the same about Tesla.
In the short term, Tesla is accelerating from zero to 60 (or zero to 20,000) at lightning speed -- and that's just grand. But what really matters is what happens after Tesla reaches cruising speed. Sure, in an era of $100 oil prices, the company has captured car buyers' imaginations. But can Tesla maintain this growth once the initial fascination wears off? More important, can it grow profitably?
These aren't rhetorical questions. Tell us what you think about Tesla and its chances -- click over to the stock's CAPS page, and sound off!