This week, S&P Capital IQ analyst Efraim Levy initiated coverage on Tesla Motors (NASDAQ: TSLA ) with a sell rating. For a stock trading at such an aggressive valuation, he's surprisingly the sole analyst to rate the stock a sell. All the other analysts covering Tesla have either buy or hold ratings. What can we learn from this outnumbered Tesla fellow?
The bullish bear
It's very possible to be extremely bullish on a company's prospects while holding a bearish outlook on the stock. It's how the economy functions. For nearly everything (except MasterCard ... priceless, right?), people have to balance value and price. And for anything with a price, there is a point at which it becomes too high -- even for America's greatest growth story: Tesla Motors.
When S&P analyst Efraim Levy gave Tesla a sell rating this week, investors were a bit taken aback. CNBC named it the "Call of the Day." Surprisingly, however, his underlying analysis doesn't sound particularly bearish.
In fact, Levy was quite optimistic in his outlook for the company. "We like the fundamental story. We see plenty of growth for the electric vehicle industry for this company, and we think that they're becoming profitable now and there's going to be a lot of profitable growth," Levy he told CNBC. He even asserted that he was "generous in some ways, more than usual, because of the unique situation, business model, technologies that they have."
Acknowledging that there is upside potential, he couldn't ignore the downside potential thanks to the stock's euphoric price. "The valuation ... is a concern," Levy said. Given the risk, Levy felt too uncomfortable to give the stock a hold rating.
Giving Tesla a $150 price target, shares would have to drop about 19% for the stock to even enter a reasonable range to merit a hold rating. But if he's right, investors could get a chance to pickup shares at a lower price later: "We expect these volatile shares to be affected by news flow and investor sentiment shifts."
Surprisingly, Levy's comments echo Tesla CEO Elon Musk's own thoughts on the stock, which he shared with CNBC in an interview in August:
I really feel like the valuation we've got right now is more than we have any right to deserve, honestly. ... Our stock price is obviously far too high based on historical financials, or even on current financials, so the value is very much based on what the future cash flows will be like. So as that confidence waxes and wanes, we'll see big swings in the value of the company.
The parallels in their thought processes prompt an interesting question: Would Elon Musk rate Tesla a sell if he was an analyst and not the CEO of Tesla?
At the end of the day there's no escaping the concept of price and value. No matter how much you love a company's products, admire its business model, or believe in its prospects, price still matters.
It's perfectly fine to be bullish on Tesla's business and bearish on the stock.
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