Next Stop for Tesla Motors, Inc. Stock: $400?

Image source: Tesla Motors.

The key risk for Tesla (NASDAQ: TSLA  ) stock is demand, Stifel Nicolaus analyst James Albertine said on Monday in a research note (via Street Insider). But even this risk is minimal, he says. "[G]iven (a) competitors' apparent unwillingness to fully invest (resources/managerial autonomy), and (b) TSLA's brand resilience in spite of high-profile accidents/fires/recalls, it seems demand deceleration may be a late decade call at the earliest." Albertine is betting big on the stock, upgrading from a hold to a buy and a price target of $400.

The market was apparently encouraged by Albertine's report. Shares have jumped by 5.5% at the time of this writing, surpassing $280. This is a new all-time high for Tesla stock.

TSLA Chart

TSLA data by YCharts.

Irrational euphoria?
Shares have been on a tear. Twelve-month and year-to-date returns are 65% and 20%, respectively. While the gains are nice, some shareholders may be getting nervous. Has the momentum entered irrational territory?

Four hundred dollars for Tesla stock is quite a price target. Not only is it 40% higher than today's price, but also the target would put Tesla's market capitalization near that of its mass-market U.S. peers Ford and General Motors. At $400, Tesla's market cap would near $50 billion. Ford and General Motors have market capitalizations of $68 billion and $56 billion, respectively.

To put the bullishness of this price target in perspective, consider that in the trailing 12 months, Tesla's revenue was about $2.5 billion while Ford and General Motors recorded $147 billion and $157 billion in revenue, respectively. Obviously, there are some seriously optimistic forward-looking expectations priced into both Tesla's $35 billion market capitalization today and this $400 price target by Stifel Nicolaus.

Indeed, optimistic expectations are essential to Albertine's price target. As the company is a key niche player in the luxury car market today, Albertine is betting on Tesla's growth story to continue solidly in the coming years.

Model S interior. Image source: Tesla Motors.

"As U.S. vehicle sales settle into a 16.5mm-17mm unit run-rate through mid-decade, we tend to favor OEMs with clearer brand messages, differentiated curb appeal, and opportunities to scale abroad," Albertine said in his research note. Tesla, Albertine asserts, fits the bill.

Albertine isn't the only analyst with huge expectations for Tesla stock.

Morgan Stanley analyst Adam Jonas has a $320 price target on the stock. Like Albertine, Jonas is betting Tesla is going to further explode onto the luxury market -- particularly with the help of its model X. In a note to investors last month, Jonas explained:

We'd be disappointed if the Model X did not sweep every major Car of the Year award on offer by the automotive media. Taking nothing away from the Model S as an exciting, historically important vehicle, Tesla has learned many valuable lessons since the development of its first entirely in-house designed and engineered product. Tesla has far greater financial and technical resources at its disposal to apply to the Model X line that did not exist for the Model S.

Albertine could be right
Of course, the key word here is could. Investors certainly shouldn't count on such a considerable gain in just 12 months. Even more, it's arguably impossible to predict any stock movements in such a short period of time.

But Albertine does capture Tesla's biggest advantage: a razor-sharp and intensely focused value proposition that stands out starkly from that of its peers. Over the long haul, this could help Tesla max out its Fremont, California, production capacity, which Tesla CEO Elon Musk said is around 500,000 vehicles per year.

Model X prototype (right) next to Model S. Tesla's Model X is expected to begin deliveries to customers in the early spring of 2015. Image source: Tesla Motors.

Hitting 500,000 vehicles per year by 2020 on the strength of continued demand for its Model S and hopefully mind-boggling demand for its Model X and Model 3 is just one of the monstrous expectations priced in to Tesla shares today. Other expectations include timely execution on Tesla's $5 billion Gigafactory and management's ability to keep up Tesla's superior gross profit margins. Today, Tesla's automotive gross profit margin minus zero-emission vehicle credits is 27%. The company anticipates to hit 28% by year-end. 

Investors considering buying Tesla shares today should carefully consider the wildly optimistic future expectations priced into the stock. At the same time, the company's impressive execution continues to give investors a reason to hold on to the stock, despite its soaring value.

Warren Buffett's worst auto nightmare (Hint: It's not Tesla)
A major technological shift is happening in the automotive industry. Most people are skeptical about its impact. Warren Buffett isn't one of them. He recently called it a "real threat" to one of his favorite businesses. An executive at Ford called the technology "fantastic." The beauty for investors is that there is an easy way to ride this megatrend. Click here to access our exclusive report on this stock.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 03, 2014, at 12:25 AM, DrDauger wrote:

    I love what's going on around TSLA. These big firm analysts are falling over themselves, making their price targets sound like a Texan cattle auction: Do I hear $300? Do I hear $320? $350? $400?

    They're running ahead of the parade to feign leadership once they heard the technicals blare this rise so loudly. Or else why couldn't they set these PTs back when TSLA was in the low $200s? The known facts on the ground weren't much different then versus now.

    It's a story about the self-proclaimed, self-interested cognoscenti as much as the stock they won't understand until the Tesla Motors company finishes reshaping the auto industry in its own image next decade.

    I set my own one-year PT of $100 to justify buying long, back when TSLA was $35. Boy was I too low, so I've given up on predicting anything other than "TSLA will go up". The difference is I admit my Foolishness.

    Having a Model S as my sole personal vehicle, making me "gas free", I can easily see Tesla is building a awesome product line in a complacent market ripe for disruption. I drove an over-twice-the-price Ferrari California T in a 30-minute test drive last week, and it, while fun, doesn't compare to my Tesla. Competitors can imitate, but cannot stop, Tesla Motors. Therefore TSLA is free to rise at will.

  • Report this Comment On September 04, 2014, at 5:12 PM, jleonard711 wrote:

    Your numbers for 12 month and YTD gains are off, it's not 65% and 20% respectively as stated in the article. As of today the the 12 month gains are 69.45% and YTD gain is 90.15%. Your 12 month number is pretty close, but the stock opened the year around $150 and is now above $280 which is way more than 20%.

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