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...
In late-breaking news, two Wall Street analysts initiated coverage on Tesla (TSLA 0.73%) stock last night. Only one of these analysts (Wedbush) likes the stock. (The other, Deutsche Bank, thinks Tesla is only fairly priced.) And yet at the same time, a couple of new developments on the business front could help swing ever more analysts toward joining Team Tesla.
Here's what you need to know.
What Deutsch Bank said
Let's begin with the less enthusiastic analyst. Initiating coverage of Tesla stock with a hold rating, Deutsche Bank opined yesterday that it sees Tesla as fairly valued at $375 a share. (Tesla closed just shy of $377 a share yesterday.)
Tesla's Q3 2018 earnings report, says Deutsche, showed a "large improvement in manufacturing execution and profitability," with the company returning to profitability for the first time in two years (according to data from S&P Global Market Intelligence).
Tesla's sales surged 129% year over year in Q3, generating a GAAP profit of $311.5 million and positive free cash flow of $831.5 million. (This was, not coincidentally, also the first free-cash-flow positive quarter for the company in two years.) And Deutsche sees no sign of Tesla slowing down. "[M]ajor manufacturing bottlenecks appear to be resolved," writes Deutsche in a note covered by TheFly.com, "and demand has shown little evidence of trailing off." For the next couple of years at least, until major automotive rivals begin producing their own electric cars in large numbers, Deutsche sees Tesla operating in a "league of its own."
What Wedbush said
Regardless, Tesla remains unprofitable on a trailing-12-month basis, and shares sell for more than 57 times forward earnings -- a big premium to the six times forward earnings GM stock fetches, for example, or the 6.4 times forward earnings that Ford shares cost. Tesla the company may be doing well, but Tesla the stock appears no better than fairly priced for its performance, in Deutsche's estimation.
Wedbush begs to differ. In an initiation that came out within minutes of Deutsche's, investment banker Wedbush asserts Tesla is actually positioned to outperform other automotive stocks. Far from fearing the arrival of new models from automotive majors, Wedbush argues that Tesla boasts the "most impressive product roadmap out of any technology/auto vendor around." Moreover, while the company's rivals are busy getting their e-fleets up to speed, Wedbush thinks Tesla can run away with the electric car market, and has a "golden opportunity" to ramp Model 3 sales in 2019 in particular.
Wedbush's conclusion: Not only is Tesla's share price reasonable today, but the stock could shoot as high as $440 by the end of next year.
Wall Street warms to Tesla
Nor is Wedbush the only automotive analyst warming up to the Tesla story. Earlier in the day, analysts at R.W. Baird upped their price target on the company's shares to $465. As Baird explained, the "narrative" surrounding Tesla stock on Wall Street is shifting from believing that "Tesla will never make money" to an increased faith that "Tesla can be sustainably profitable."
This is a trend that Baird believes "will continue to improve as the company proves it can be self-supportive," and a couple of new developments promise to give this story a tailwind.
Yesterday, Electrek reported that with the automaker's objective of producing 5,000 cars a week now accomplished, Tesla is planning to begin shipping as many as 3,000 Model 3 electric sedans a week to Europe -- beginning as early as February. Combined with the 4,000 Model 3s-a-week demand Electrek sees in North America, this works out to about a 40% increase in the company's production rate.
Forty percent -- or more. Because at the same time as Tesla is satiating U.S. electric car demand and heightening the challenge to European automakers on their own turf, Reuters reports that a reduction in China's car tariffs is permitting the company to slash sticker prices on cars shipped there. Model S prices are expected to fall by $15,200, and Model X prices by $9,400, which should logically translate into stronger Chinese demand for both of these models as well.
China's expected to tear down its tariff wall on foreign imports on Jan. 1, 2019, so we should begin to see stronger Chinese sales as early as Q1 of next year.
The upshot for investors
With no P/E ratio and negative free cash flow over the past 12 months, the jury's still out on whether Tesla's Q3 2018 performance will be as short-lived as the company's turn to profitability in Q3 2016 was. If Tesla fails to repeat Q3's success in Q4, the stock will look as expensive as it ever has -- and Wall Street's enthusiasm could quickly fade, no matter how strong the prospects look in the first quarter of 2019.
On the other hand, though, indications of big increases in electric car production for markets in North America and Europe and China suggest that's not the way this story is heading right now. Tesla's got momentum, Wall Street has taken notice, and investors need to be alert to the possibility: The Tesla story may have permanently changed for the better.