Following one analyst's bearish note last week on Tesla (TSLA 1.50%) stock, another analyst is making the opposite assertion. An analyst from Baird said on Tuesday morning that shares could soar to $252. That translates to 34% upside from where the stock is trading at the time of this writing and is 68% higher than the $150 price target set by Bernstein last week.
What exactly has Baird so bullish on Tesla stock? One key factor is the company's market-leading operating margins, which allow Tesla to price its vehicles competitively -- case in point is Tesla's most recent round of price cuts to its vehicles.
Here's a closer look at the analyst's optimistic view for the growth stock.
Reiterating a $252 price target
As interest rates rise, making it more difficult for consumers to finance new vehicle purchases, Tesla is doing what it can to help the consumer (and hopefully its business). The company has rolled out a handful of price cuts this year, with its most recent one hitting its website last week. On Thursday evening, Tesla lowered the price of its flagship Model S and X vehicles by $5,000 each. In addition, it cut prices of its more affordable Model 3 and Y vehicles by $1,000 and $2,000, respectively.
Baird, which reiterated its $252 price target for the stock on Tuesday, seems to think these price cuts demonstrate Tesla's market dominance. The firm said in a note to investors that the automaker should be able to roll out these price cuts while maintaining industry-leading operating margins. Indeed, Baird asserts that Tesla is better positioned than any of its auto manufacturer peers to endure a weak macroeconomic environment.
The firm's price target was first set for the stock late last year, when Baird lowered its price target for shares from $316 to $252. The lowered price target, Baird analyst Ben Kallo explained, reflected an environment in which demand for Tesla vehicles could slow.
However, the target still implied huge upside from where the stock was trading at the time. Kallo's confidence stemmed from an expectation that three catalysts will help the company this year: growing production capacity at its factories, upcoming vehicle launches, and a fast-growing energy business.
Tesla stock is up more than 66% since Baird set its $252 price target for the stock.
Is Tesla stock a buy?
Investors, of course, shouldn't buy a stock simply because one analyst has a high price target for shares. At the end of the day, do your own due diligence to come up with an estimate of a stock's fair value before considering making an investment.
But the stock does look somewhat attractive at 52 times earnings. Considering how rapidly the company has been growing its sales, this seems like a reasonable (if not low) valuation. Tesla recently announced that its first-quarter deliveries rose 36% year over year -- an acceleration from the 31% growth posted in the prior quarter.
Further, Tesla's business generates a huge stream of cash. Free cash flow was $7.6 billion in 2022, up from about $5 billion in 2021 and less than $3 billion in 2020.
But justifying a valuation of $252 per Tesla share requires quite a lot of imagination. While it's certainly possible, seemingly everything would have to go right for the electric car company -- during a period when macroeconomic challenges could worsen substantially.
