It's been a great week for Elon Musk. As CEO of Tesla Motors (NASDAQ:TSLA) and chairman of SolarCity (NASDAQ:SCTY.DL), both stocks have soared this week. SolarCity and Tesla are up about 24% and 13% in the past five days, respectively. What's the story?
Tesla deliveries soar
The world's most valuable electric-car manufacturer shared some optimistic news earlier this week at the Detroit Auto Show.
- Q4 Model S deliveries were considerably higher than expected, at 6,900 compared to guidance for slightly under 6,000.
- Tesla wants to build a no-fee network of Supercharger stations in China.
- The company plans to double its service and sales centers in 2014.
All of these announcements provide investors incrementally greater confidence in the company's disruptive story to eventually become a large auto manufacturer producing hundreds of thousands of vehicles per year.
SolarCity gets a wild price target
As if SolarCity's 400% gain over the past 12 months isn't enough, Deutsche Bank just initiated coverage on the stock at a buy with a $90 price target. Even after the stock's 7.5% gain this morning at the time of this writing, $90 is a 22.4% premium to today's price. Deutsche Bank analyst Vishal Shah cites high interest in the solar-backed securities the bank recently issued and a very large total addressable market, or TAM, as reasons for the bullish rating.
Deutsche Bank says that its recently issued solar-backed securities are popular among investors. They are "very interested" in them, according to Deutsche Bank. This bodes well for SolarCity's announcement this week that it will be offering retail investors opportunities to to buy and sell the companies debt. SolarCity CEO Lyndon Rive says that he thinks the company can raise "billions" of dollars by offering this financial product.
Deutsche Bank offered useful perspective on just how small SolarCity's penetration is in relation to its TAM.
We estimate the company's market penetration is ~0.2% in existing markets, which implies considerable room for expansion within current markets and into new markets. We believe SCTY's cumulative [megawatts] deployed can reach at least ~3GW by 2016 which would still imply only ~1% market penetration. Our 2016 estimates are likely conservative as the company has a target to reach ~1M customers implying ~6GW deployed by mid 2018 timeframe.
What about valuation?
Both Tesla and SolarCity look overvalued when investors view them from a fundamental point of view. But Deutsche Bank's approach to view SolarCity in relation to its TAM can also be applied toward Tesla, too; when these companies are analyzed this way, their stories looks considerably different.
Looking at Tesla, for instance, the company sold 22,450 vehicles year to date. General Motors alone sold about 9.7 million vehicles in 2013. Obviously investors shouldn't expect Tesla to reach levels even comparable with GM any time soon, if ever. But consider that Tesla is supply limited with abundant demand despite an advertising budget of zero. With hot sales momentum, enormous plans for production (including a record-breaking lithium-ion factory), and a huge TAM, Tesla's audacious goals for hundreds of thousands of cars per year when it launches its affordable electric car don't seem that far-fetched.
Should investors jump in?
While the soaring prices of SolarCity and Tesla do signal that the companies are doing something right, the stock market is forward-looking -- so solid execution is already priced into these stocks. While I'm a shareholder of both stocks and I certainly wouldn't consider selling, investors who are confident in these companies' stories should proceed with caution at these levels.