Last weekend I lent an ear to the only analyst with a sell rating on Tesla Motors (TSLA 1.98%). Now I'm turning to the Tesla bulls to see if there is anything we can learn from them.
Why buy Tesla?
Among the analysts covering Tesla, four have a buy rating for the stock, according to Yahoo! Finance. That's four times the analysts that rate the stock a sell. With the stock up more than 500% in the last 12 months, it's natural to wonder whether their recommendations are based on momentum or on fundamentals. Let's take a look at three of these analysts' opinions to find out.
Wedbush analyst Craig Irwin has a price target of $240
Irwin's reasoning is based on fundamentals, albeit with an extremely positive outlook. He expects Tesla to sell 100,000-150,000 third-generation vehicles in 2017, and 300,000-500,000 annually in the longer term. Based on that scenario, he believes Tesla could earn $10.10 in 2017.
If his projections came true, there may be upside to Tesla's valuation. But by valuing Tesla on what seems to be a best-case scenario (considering that the company is currently only producing cars at an annual run rate of about 21,000), the less rosy potential outcomes are not receiving any weight in the valuation. This renders the valuation useless because any valuation should give weight to a range of outcomes.
Deutsche Bank analyst Dan Galves has a price target of $200
Galves' comments suggest he's totally submerged in typical Wall Street shortsightedness. He has raised his target from $160 to $200 on margin and demand progress for the third quarter and he says there is "limited potential for negative catalysts in the near term."
Basing his incrementally greater confidence in the third-quarter performance partly on Tesla owners' blogs suggests that he is referring to the VIN number tracking going on over at Tesla's forums. Though the data is convincing, it has limitations. And even if Tesla was able to produce more cars than expected in the third quarter, the short-term outcome wouldn't have a large impact on estimates for the company's affordable car to launch around 2017, the primary basis of a Tesla valuation.
And margin progress is nothing new. It became very clear that Tesla would reach its target 25% gross profit margin soon when the company reported second-quarter earnings.
Sure, Galves' did say he had "confidence in the late-decade volume, margin, and earnings estimates," but without any elaboration or any new information, this still looks like nothing more than a best-case scenario. We need some more meat to chew on. As soon as one of the bullish analysts can acknowledge the potential of less fortunate outcomes and logically explain why a scenario that resembles the one Irwin laid out above is highly probable, we're playing with fire here. Speculation is not an investor's friend.
Jefferies analyst Elaine Kwei has a price target of $210
Boosting her target from $160, Kwei must have discovered some very convincing new data. If she did, however, she didn't share it. But here is what she did share: "The company's track record of innovation and groundbreaking products give us confidence in the execution of future vehicles." Unfortunately, this statement doesn't provide any quality analysis to help us make an educated conclusion on whether or not the stock is a buy.
We need a better bullish case
Investigating these analysts' explanations provides no valuable analysis for incremental confidence in the stock. If Tesla bulls don't have a convincing case for the stock's value, why should any prospective investor buy shares at today's price?
