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...
This morning, the Canadian investment banker upgraded shares of Elon Musk's electric car company from hold to buy and assigned a $450 price target, implying 44% upside from today's prices.
Upgrading Tesla stock
Canaccord Genuity cites several reasons for why it likes Tesla -- ranging from its hope that putting Larry Ellison and Kathleen Wilson-Thompson on Tesla's board will help keep Musk from making any more unwise moves, to optimism about the future for Tesla's Model 3 electric sedan (now officially the best-selling premium vehicle in America).
Tesla reported earning $140 million in profit on $7.2 billion in sales in Q4 2018. That wasn't nearly as great a profit margin as the company achieved in Q3, but it marked the first time Tesla had put together back-to-back GAAP-profitable quarters. What's more, it actually generated more real free cash flow in Q4 than it did in Q3, and more free cash flow than reported profit to boot -- $880 million in Q4, versus $830 million generated in Q3 2018, according to data from S&P Global Market Intelligence.
These back-to-back profitable (and cash-profitable) quarters should allay investor concerns about Tesla's ability to profit from the Model 3 going forward, argues Canaccord in a note covered on StreetInsider.com (subscription required). And its production of roughly 150,000 Model 3s in 2018 should reassure investors about the company's ability to produce the car at scale.
Caveats and quibbles
Granted, not everyone is as enthusiastic about Tesla as is Canaccord Genuity. In June of last year, the company was forced to lay off 9% of its workforce in a move Musk said was designed "to reduce costs and become profitable."
It worked. But last month, Tesla announced further fat-trimming -- 7% of the workforce -- and media outfits are beginning to report that these layoffs directly targeted Tesla's car-delivery operations in the U.S. If true, this would both imply that orders for Model 3 sedans are waning, and also potentially slow down sales by making it a little bit harder for cars to reach buyers.
That's not the way Canaccord sees it, however. Instead, the analyst highlights Tesla's workforce reductions as necessary cost-cutting, directly related to Musk's goal of being able to sell people a mass-market Model 3 for $35,000 before incentives. Assuming he succeeds in this goal, and combined with the potential for strong sales to Europe and China, Canaccord believes the company will not only score a "tiny profit" in Q1 2019, but grow that profit steadily throughout the year.
The big reveal
Potentially the most important point Canaccord Genuity makes today, however, is its prediction that not electric cars per se, but the autonomous driving software that guides them, will be the defining technology in ground transportation in the future. While many companies are testing autonomous driving software and self-driving cars, Canaccord Genuity believes that Tesla's Autopilot has pole position in this race, and indeed holds "an almost insurmountable lead" over its competitors.
What it means to investors
Granted, "It's tough to make predictions, especially about the future." But consider:
Tesla already has not one, not two, but three electric car battery Gigafactories in various stages of construction, and plans to build even more -- while no other car company has built even one. If Canaccord is right about the company winning an "insurmountable lead" in autonomous driving software as well, then it could now have a lock on arguably the two most important technologies that go into making self-driving electric cars: The software that runs them, and the batteries they run on.
Check out the latest Tesla earnings call transcript.
Now, Tesla appears to be succeeding in dominating these two technologies at the very moment when car companies around the world are committing to build electric cars at scale. Coincidentally, this morning also saw Morgan Stanley publish a report warning that Tesla will soon face "serious competition" as other manufacturers begin bringing electric cars to market en masse, which could put a crimp in its ability to remain profitable in the car-making business.
But what if, rather than worry about production rates, delivery schedules, and competing with other manufacturers for electric car market share, Tesla instead evolves into a go-to supplier of electric car technologies -- simply sitting back and selling or licensing these crucial components to other manufacturers?
I'd argue that if that's the way things go in the future, even Tesla's current share price might not be too much to pay for what it one day may be worth.