At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
Tesla = Apple?
A little more than a month ago, fans of electric-car pioneer Tesla Motors (Nasdaq: TSLA) got shocking news: Morgan Stanley, long a fan of the stock, had turned coat on Tesla. Downgrading from an overweight rating, Morgan skipped right past the traditional pit stop at neutral and went straight to an underweight rating on the stock. (Wall Street-speak for "sell.")
Key to Morgan's sell thesis was a major rethink on the popularity of electric cars. According to the analyst, as far out as 15 years from now, we're still probably only going to see e-cars making up about 5% of global car sales. Pretty small beans considering some of the companies that have been talking up the concept, but not everyone agrees with this downbeat assessment.
Case in point: Yesterday, at the break of dawn, rival banker Jefferies & Co. initiated coverage of Tesla with a buy rating and a bold pronouncement: "If Apple made a car, this could be it! Tesla's strategy is based on a combination of technology, performance, unconventional marketing, and a 'cool factor.'"
The way Jefferies sees it, comparing Tesla's (old) Roadster or (new) Model S to the green econoboxes on offer like Ford's (NYSE: F) Focus, Toyota's (NYSE: TM) Prius, or General Motors' (NYSE: GM) Volt is entirely the wrong way to look at these things. Tesla's real rival, writes Jefferies, is not any of the profitable mass-market vehicle makers, but rather luxury-car builders such as BMW (OTC: BAMXY), noting the appropriate economic question is "Would you buy a Model S with similar price/performance to a BMW 5-series and the ability to use cheaper electric fuel?" And more to the point, would you buy Tesla's luxury e-buggy over BMW's premium gas-guzzler if you knew that, say, Leonardo DiCaprio owned a Tesla?
Because, as it just so happens, he does. And so does Dustin Hoffman. And Jay Leno. And Matt Damon, Sergey Brin, and... Condoleezza Rice. Fact is, there's a whole website devoted to spotting "cool" celebrities in their Tesla-mobiles. And if Wall Street, Silicon Valley, and the upper echelons of the Washington, D.C., elite all think that Tesla is cool, maybe you should, too.
The price of cool
And it goes without saying that if enough people think Tesla is cool, then a lot of them will buy its cars. (Especially once the advent of the Model S brings the price point down below six figures.) The question, though, is whether even charging $60,000 a pop is going to be enough to make a successful business out of Tesla and a profitable investment for you.
Here's what we know: So far, Tesla has never earned a profit, despite selling more than 1,800 Roadsters at $100,000 apiece. We know that Tesla is:
- Deep in $226 million worth of debt.
- Burning increasingly large piles of cash with each passing year.
- And at its current rate, will burn through all its cash within 12 months.
And we know that if CEO Elon Musk delivers on his promise to bring Model S to market by July, and to turn Tesla profitable next year, none of this will matter a whit. Because Mr. Market doesn't care nearly so much about the money a company has lost in the past as it does about the profits a company can earn in the future.
Can he do it?
So can Musk pull it off, make Tesla a success story on the order of Apple, prove Morgan Stanley wrong, and make Jefferies look like a genius? The answer is a definite "maybe." Even Morgan admits that Tesla's performance on the Model S so far has been "near-flawless ... pre-production," and that in all likelihood, "the Model S [will indeed] launch on time in July." And if the analysts are right about that, then maybe they're also right about the $1.28 per share Tesla will earn next year, the $2.38 it will earn the year after, and the $2.98 per share it will earn in 2015.
From there... it's off to the races.
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