Why Are These Tesla Motors Analysts So Bullish on the Stock?

Last weekend I lent an ear to the only analyst with a sell rating on Tesla Motors (NASDAQ: TSLA  ) . Now I'm turning to the Tesla bulls to see if there is anything we can learn from them.

Why buy Tesla?
Among the analysts covering Tesla, four have a buy rating for the stock, according to Yahoo! Finance. That's four times the analysts that rate the stock a sell. With the stock up more than 500% in the last 12 months, it's natural to wonder whether their recommendations are based on momentum or on fundamentals. Let's take a look at three of these analysts' opinions to find out.

Wedbush analyst Craig Irwin has a price target of $240
Irwin's reasoning is based on fundamentals, albeit with an extremely positive outlook. He expects Tesla to sell 100,000-150,000 third-generation vehicles in 2017, and 300,000-500,000 annually in the longer term. Based on that scenario, he believes Tesla could earn $10.10 in 2017.

If his projections came true, there may be upside to Tesla's valuation. But by valuing Tesla on what seems to be a best-case scenario (considering that the company is currently only producing cars at an annual run rate of about 21,000), the less rosy potential outcomes are not receiving any weight in the valuation. This renders the valuation useless because any valuation should give weight to a range of outcomes.

Deutsche Bank analyst Dan Galves has a price target of $200
Galves' comments suggest he's totally submerged in typical Wall Street shortsightedness. He has raised his target from $160 to $200 on margin and demand progress for the third quarter and he says there is "limited potential for negative catalysts in the near term."

Basing his incrementally greater confidence in the third-quarter performance partly on Tesla owners' blogs suggests that he is referring to the VIN number tracking going on over at Tesla's forums. Though the data is convincing, it has limitations. And even if Tesla was able to produce more cars than expected in the third quarter, the short-term outcome wouldn't have a large impact on estimates for the company's affordable car to launch around 2017, the primary basis of a Tesla valuation.

And margin progress is nothing new. It became very clear that Tesla would reach its target 25% gross profit margin soon when the company reported second-quarter earnings.

Sure, Galves' did say he had "confidence in the late-decade volume, margin, and earnings estimates," but without any elaboration or any new information, this still looks like nothing more than a best-case scenario. We need some more meat to chew on. As soon as one of the bullish analysts can acknowledge the potential of less fortunate outcomes and logically explain why a scenario that resembles the one Irwin laid out above is highly probable, we're playing with fire here. Speculation is not an investor's friend.

Jefferies analyst Elaine Kwei has a price target of $210
Boosting her target from $160, Kwei must have discovered some very convincing new data. If she did, however, she didn't share it. But here is what she did share: "The company's track record of innovation and groundbreaking products give us confidence in the execution of future vehicles." Unfortunately, this statement doesn't provide any quality analysis to help us make an educated conclusion on whether or not the stock is a buy.

We need a better bullish case
Investigating these analysts' explanations provides no valuable analysis for incremental confidence in the stock. If Tesla bulls don't have a convincing case for the stock's value, why should any prospective investor buy shares at today's price?

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Read/Post Comments (7) | Recommend This Article (1)

Comments from our Foolish Readers

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  • Report this Comment On October 26, 2013, at 9:23 AM, Soflason wrote:

    I believe there are more compelling reasons analysts (and many investors) are bullish on TSLA, some of these are laid out in more detail here:

    http://www.investnaire.com/?q=groups/tesla-investment-and-tr...

  • Report this Comment On October 26, 2013, at 1:10 PM, Johnny04 wrote:

    It's bullish because Elon won't let it plummet. If you look through all the news articles, you'll see most news comes from Elon or Tesla. There are very few cases reporters uncovered themselves. Elon controls the media. The stock may fluctuate within the +/-20% range, but it won't plummet. He needs other automakers to follow him to make electric cars mainstream, and no one would if the stock plummets.

    He said a lot of things in the past few days and that's no accident. He could have saved all the news for the third quarter report, which is just a couple of days away, but he needs to stabilize the stock.

    How can you say Tesla's ability to produce more cars now doesn't impact the long run? It clearly shows the demand is growing since it still has supply constraint. You said that one analyst gives the target price of $240 because he expects Tesla to produce 100,000-150,000 cars in 2017. If they can produce 35k-40k this year, they could produce 70k-80k next year, and 100k-150k in 2015, 200k-250k in 2016, and 300-350k in 2017. Are you sure it won't impact in the long run?

    Nonetheless, the Model S now attracts many groups of people: the environmentalists, the early tech adopters, car lovers, people who want the safest cars for their families, and rich people who want to be cool. The demand is growing and growing fast.

  • Report this Comment On October 26, 2013, at 4:08 PM, jamesdan567 wrote:

    The author is young, bright and grossly inexperienced.

    The Tesla EV is 400% less expensive to operate and maintain than a comparable ICE car. This incredible disruptive gap will continue to widen as battery and solar economics improve and gas prices inevitably rise. Parity and mass adoption of EV's is inevitable. ICE makers simply wish to manage this to a pace they can comfortably accommodate. That wish has become wishful thinking since the introduction of the Model S.

    The ICE car makers do not want EV's to succeed quickly. The EV lack of maintenance needs starves their dealers and their very high efficiency makes their ICE cars look expensive.

    By design, that's why the Prius, the Leaf, the Volt, and the I3 all have a dumb looking boxy shape. The major ICE makers do not wish consumers to see sleek, cool looking EV's since this will disrupt their ICE business. They price with this in mind too. Their hopes have been dashed.

    Tesla has destroyed the negative perception the ICE makers have been carefully trying to instill in the public's minds worldwide about the EV, its characteristics and economics. Tesla put a supermodel in the room full of frumpy wallflowers.

    As a result, the absorption rates and transition rates to a global auto market dominated by EV's have been radically affected in Tesla's favor. The primary benefactor is Tesla. Tesla will garner substantial market share and ICE makers will all have to write off their ICE investments and convert to 100% EV or face BK.

    Tesla is undervalued just as Apple was when it released the iPod. Analysts then could not see that the iPod was the precursor to something much better (the iPhone). The Model S is the precursor to something much better.

    After 35 years investing its pretty easy to see. No numbers needed.

  • Report this Comment On October 26, 2013, at 4:56 PM, highgrowthcarson wrote:

    Jamesdan -- agree 100%. The long bull case for tsla is pretty easy to see. Yes the stock has risen rapidly but that is because the company has shot out of the gate, proved that it could make a world-class car, proved it could build a production facility and make it reasonably efficient, raised lots of capital and moved many rapid steps along the execution of its audacious plan.

    I too believe that existing ICE makers have little chance of competing against the tech powerhouse that is Tesla motors.

  • Report this Comment On October 26, 2013, at 6:21 PM, 68surfer wrote:

    Mr. Sparks claims his investing thesis is to buy great companies and hold for a long time while the company (in this situation Tesla) and it's stock matures. However as soon as many analysts started saying Tesla was way overvalued he turned his tail and ran selling his position in Tesla. I sure have to wonder why he would do this? IMO this makes his credibility as a writer and investor very suspect indeed. So what's up Dan? Care to explain? It does not take much effort to see Tesla is surely a disruptor to the car industry and even a novice investor can see that companies that innovate above others is a sound investment.

  • Report this Comment On October 27, 2013, at 10:06 AM, drax7 wrote:

    Between model s and x , tesla can sell 100,000 cars in 2015. Say they make 25% gross margins and about 12% net margins, or about 10,000 profit per car. That equates to a billion profit in 2015, and at a 30 to 50 p/e we get a mkt cap in the 30 to 50 billion range. That justifies it's present value if not much more.

  • Report this Comment On October 28, 2013, at 12:12 AM, TMFDanielSparks wrote:

    @68surfer,

    Thanks for the comment.

    On rare occasions, some stocks just get way, way too expensive. Selling was a tough decision, and selling is something I don't do very often.

    Check out this article in which I discussed the thinking behind the decision:

    http://www.fool.com/investing/general/2013/10/02/the-tesla-d...

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