Who's Really Driving Tesla Motors' Stock?

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

Stocks were little changed today, as the benchmark S&P 500 and the narrower Dow Jones Industrial Average (DJINDICES: ^DJI  ) fell 0.1% and 0.2%, respectively. While volatility in the S&P 500 was muted, Tesla Motors (NASDAQ: TSLA  ) took investors on another wild ride, as the stock surged 13% on a dot.com era-worthy analyst note from Morgan Stanley. Shares of Tesla are up more than sixfold over the past twelve months.

Let's step back in time only as far as last October, when Tesla Motors opined publicly that "the stock price that we have is more than we have any right to deserve." On that day, the stock closed at $173.15. Fast forward four months and the stock is now 43% higher, at $248.

Today's price pop is the result of an extremely bullish note from Morgan Stanley, in which analyst Adam Jonas more than doubled his stock price target to $320, from $153. The new forecast is based on a 15-year outlook. If you feel like betting on that forecast, ask yourself: What is the degree of confidence anyone can have regarding the size and profitability of Tesla Motors in 15 years' time?

Make no mistake about it: Jonas' assumptions are very aggressive. Even his bearish scenario -- which values the shares at just $100 -- has Tesla growing its auto production roughly tenfold to 220,000 vehicles by 2020 (from 22,400 last year). The base case scenario behind his $320 price target has Tesla manufacturing 370,000 vehicles per year by 2020.

I have written before of my admiration for Tesla Motors and its CEO Elon Musk. What they have already accomplished is nothing short of remarkable and there is good reason to be excited about what they may yet accomplish. However, the stock must really be analyzed as a separate beast -- one that is now being driven by momentum "investors" and/or starry-eyed growth investors.

I have some sympathy for the second constituency; to quote Economics Nobel laureate Daniel Kahneman: "The combination of optimism and overconfidence is one of the main forces that keep capitalism alive." However, if you're going to be a "public market venture capitalist," you need to be prepared for the possibility -- perhaps even the likelihood -- of a permanent and significant loss of capital if the rosier-than-rosy scenario that is embedded in Tesla Motors' stock price on doesn't come to pass. By my (sober) reckoning, that price is now divorced from even an optimistic outlook for the company's fundamentals.

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Read/Post Comments (13) | Recommend This Article (2)

Comments from our Foolish Readers

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  • Report this Comment On February 25, 2014, at 7:47 PM, psclano wrote:

    On what basis exactly?

  • Report this Comment On February 25, 2014, at 8:34 PM, teslaman wrote:

    "Let's step back in time only as far as last October, when Tesla Motors opined publicly that 'the stock price that we have is more than we have any right to deserve.'"

    Yes, let's do.

    But first pull the Nasdaq shorts report and observe that, at the time, the number of shorts had leveled off at about 20 million shares and had been stagnating there for about 3 or 4 months.

    With Musk's sly encouragement, the shorts were emboldened and didn't hold back. Short interest took off following his statement and was back to 30+ million within a month.

    Thus, the stage was set for what we are about to receive - another massive short-squeeze followed by another brilliantly-timed capitol raise, courtesy of the gullible shorts.

    Musk didn't think the stock was overpriced, he just wanted the haters to think it was.

  • Report this Comment On February 25, 2014, at 8:40 PM, deeageaux wrote:

    Tesla CTO and co-founder JB Straubel gave a talk at Stanford and projected 700k units by 2020. 370k is not extremely bullish.

    Obviously that was JB's personal opinion not official Tesla guidance but it does give us an insight into company thinking.

  • Report this Comment On February 25, 2014, at 10:24 PM, djtetsu wrote:

    Go tsla! Brilliant minds making brilliant cars.

  • Report this Comment On February 25, 2014, at 10:40 PM, Sunpowergo wrote:

    let's see, Tesla announced that it is about to build a battery facility that equals the volume of all of the other battery companies on earth. So explain why that doesn't add value equal to all of those other companies? Isn't the fact that they will be more efficient, using recycled materials, and be the most modern facility something to include in the value? So far Musk has delivered on his big promises, Rockets, Cars, Solar, so you want to bet against him. Fool.

  • Report this Comment On February 25, 2014, at 11:15 PM, TMFAleph1 wrote:

    @Sunpowergo

    Thanks for your comment, but I never said I wanted to bet against Elon Musk. In fact, if you read the article, you'll see that I wrote:

    "I have written before of my admiration for Tesla Motors and its CEO Elon Musk. What they have already accomplished is nothing short of remarkable and there is good reason to be excited about what they may yet accomplish."

  • Report this Comment On February 25, 2014, at 11:32 PM, jetamerica wrote:

    It is sad to read that those who make a reasonable case either in support of or against the value of TSLA stock are characterised as "haters" or lovers of TSLA/MUSK.

    This is a well written and thoughtful review. Like him I admire Musk and his ability. However, I also believe that the valuations given for whatever reason, are completely unrealistic. If one believes that the potential for building a battery factory is so important, clearly the place to invest is in Panasonic which has cash flow in the $ billions and a 10 X PE. The TSLA cars will remain a niche product and will never account for even a fraction of 1% of the industry.

    MS quotes sales in 15 years time and seems to assume that there will be no competition just because TSLA has sold about 30,000 cars in a 100 million car market

    I fear more for the overall market than TSLA as I see a complete abdication from valuation reality from so many momentum stocks. Remember that the NASDAQ stil needs to grow 20% just to recover its position of 15 years ago when we had similar mindless euphoria during the dotcom boom

  • Report this Comment On February 26, 2014, at 6:32 AM, TMFAleph1 wrote:

    Here is some more detail on the more-than-generous assumptions underpinning Morgan Stanley's base case valuation ($320):

    "We argue Tesla cannot be valued on near-term multiple metrics like traditional auto companies given that we expect Tesla to multiply revenues by more than 10x from 2013 to 2016 by nearly 30x by 2020 and around 60x by 2028. We have thus chosen a 15-year time horizon for our DCF which captures the full maturation of the Model S, Model X (and top-hat derivatives) and also the ramp up of its mass market electric vehicle (the Gen 3).

    We have applied a 11% WACC with a range of 9% to 13%. The terminal value, calculated on a midpoint of 10x EV/EBITDA accounts for roughly 50% of the total DCF value across the range of methodologies we have applied to arrive at our PT."

    http://ftalphaville.ft.com/2014/02/25/1781892/this-is-nuts-w...

  • Report this Comment On February 26, 2014, at 6:46 AM, TMFAleph1 wrote:

    It turns out that the analyst who penned the note, Morgan Stanley's Adam Jonas, asked Elon Musk about the possibility of a capital raise through a share offering on last week's conference call:

    http://ftalphaville.ft.com/2014/02/26/1782672/a-chinese-wall...

  • Report this Comment On February 26, 2014, at 10:28 AM, teslaman wrote:

    jetamerica,

    I don't disagree with anything the author said. I don't know where you got that idea.

    I've shorted many stocks in my life and unlike some, I believe that shorting is a good and necessary thing. If I thought Tesla was as overpriced as many seem to think, I'd short it too.

    I don't think shorts are "haters." What I meant to say is that TSLA shorts are haters. It's true. Most every one of them you talk too is excessively defensive of their decision even when you offer no criticism.

    Its like a religion to them. They often go off on a rant - criticizing Musk as a liar and cheat while throwing sticks and stones at the stock itself.

    The early TSLA investors were called a cult even by even-tempered investors and analysts. Not any more! Its just the shorts who continue to chant that incantation - as if somehow, their combined energy will appeal to the investing gods and they will mercifully STRIKE DOWN the TSLA price to its rightful level of 12.00/share.

    No jetamerica, its not the longs who are a hateful religious insane cult. Its the TSLA shorts - not ALL shorts, but only the TSLA shorts. They hate TSLA with a religious fervor that I have not seen very often in my investing experience.

  • Report this Comment On February 26, 2014, at 1:54 PM, dlwatib wrote:

    370,000 vehicles per year by 2020 is a low-ball estimate. Even JB Straubel's projected 700k units by 2020 is low-balling it. It's not at all unreasonable to project to a 2020 figure in the millions of units. Given that the stated goal of Tesla Motors is to transform the auto industry to sustainable transport, and other manufacturers are showing extreme reluctance to abandon their gas guzzling ways, Tesla will have to grow that fast and sell that many if it is to achieve its stated goal. I certainly don't expect the fossil fuel-based auto industry to go down without a fight, but they are going down one way or another. They simply aren't on a sustainable path, and Tesla is.

    What should the market cap be for a company that is willing to take on an entrenched industry and completely transform it? I don't think it makes sense to value it any less than one of the current market leaders in that industry.

  • Report this Comment On February 26, 2014, at 3:46 PM, Mega wrote:

    No mention of the utopian society?

    Yes, yesterday's hilarious analyst note actually indicates "utopian society" is part of the bullish case for TSLA.

  • Report this Comment On February 26, 2014, at 6:00 PM, TMFAleph1 wrote:

    And... Tesla announces a $1.6 billion convertible note offering. The joint book-running managers are Goldman Sachs, J.P. Morgan, Deutsche Bank Securities and... Morgan Stanley.

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