Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...
What do you do when one of the top analysts on the planet slashes its earnings forecast for one of the most popular stocks in America -- but then recommends buying the stock anyway, and raises its price target 65%? I don't know about you, but I sit up and pay attention.
Because that's exactly what we're seeing this morning, as investment banker Piper Jaffray -- ranked in the top 20% of investors we track on Motley Fool CAPS -- announced a new upgrade for shares of Tesla (TSLA 1.85%) stock.
Car buyers reserved Tesla's Model 3, some before even the vehicle was unveiled. Investors may happily do the same with Tesla stock. Image source: Getty Images.
1. Upgrading Tesla
Here's how the story goes. This morning, Piper Jaffray announced the results of a seven-month road test it's conducted on a Tesla electric car, and a parallel valuation test it's conducted on Tesla stock. Its conclusion: Tesla stock deserves an upgrade from neutral to overweight (aka buy).
As detailed in twin reports on TheFly.com and StreetInsider.com this morning, Piper says it's impressed with the car, and "can't ... ignore" the stock any longer. In particular, Piper says it's met with Tesla management and come away convinced that Tesla will meet its goal of beginning deliveries of a Model 3 electric sedan this year -- and the car's going to be a hit.
2. Tesla's "captivating impact"
Actually, those aren't Piper's exact words. To be precise, what the analyst said is that Tesla's electric cars have a "captivating impact on consumers and shareholders alike."
Which is good news for Tesla, because the price on this stock just went a lot higher.
3. Tesla by the numbers
Following a strong Q1 deliveries report last month, Tesla stock gained 7% in a day, and hasn't looked back since. Now, you might think that the initiation of Model 3 deliveries this year would add to that good news, and maybe even drop some profits to Tesla's bottom line ahead of schedule. (According to most analysts cited on S&P Global Market Intelligence, Tesla is expected to report its first full-year profit in 2019, and its first pro forma profit in 2018.)
Piper used to count itself among those optimistic analysts, but after crunching the numbers carefully, and meeting with management, Piper now warns investors to buckle up for a bumpy ride. Piper predicts Tesla will run into production inefficiencies in striving to fulfill its Model 3 promise, with the result being that profits at the company will take a hit. Instead of beginning to earn profits as early as Q3 of 2017 (Piper doesn't specify whether it's referring to pro forma profits or the real, GAAP-calculated variety), the analyst now believes Tesla will lose money in every single quarter of 2017, and end this fiscal year with a $4.83-per-share loss -- versus the $0.42-per-share profit it previously predicted.
Furthermore, Piper expects Tesla to lose money in Q1 2018 ($0.88 per share) and Q2 2018 as well ($0.81), only turning profitable -- finally -- in Q3 2018, one full year later than it had previously hoped to see.
And even then, Piper says Tesla will lose money for 2018 as a whole -- $0.11 per share worth.
So...sell Tesla, right?
Put it all together, and what Piper Jaffray is predicting is two more long years of no profits whatsoever coming out of Tesla stock, and only a chance of the stock turning profitable in 2019. For the record, that's also the year most other analysts on Wall Street believe Tesla will finally turn profitable, and earn about $0.20 per share in GAAP net profit.
Despite all this, and despite the prospect of delayed gratification, Piper insists Tesla stock is a buy. Employing what by its own admission the analyst calls "a 'creative' valuation methodology," Piper argues that Tesla stock today -- at least two years before it earns its first profit -- is worth $368 per share. That's 65% more money than Piper previously thought Tesla stock was worth. It also values the stock, today, at a simply astounding 1,840 times the profits that most analysts believe that Tesla stock will earn...two years from now.
Does this sound like a crazy valuation? Yes, it does. Then again, Tesla had no problem attracting pre-orders for 400,000 cars from buyers willing to wait a year (or longer) before they could ever hope to see their new cars. Maybe Tesla investors will prove willing to wait as long (or longer) to see their company earn a profit.
