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Who's Really Driving Tesla Motors' Stock?

By Alex Dumortier, CFA – Feb 25, 2014 at 7:00PM

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Tesla's share price is riding high on hope on hype

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

Stocks were little changed today, as the benchmark S&P 500 and the narrower Dow Jones Industrial Average (^DJI -2.11%) fell 0.1% and 0.2%, respectively. While volatility in the S&P 500 was muted, Tesla Motors (TSLA -6.32%) took investors on another wild ride, as the stock surged 13% on a dot.com era-worthy analyst note from Morgan Stanley. Shares of Tesla are up more than sixfold over the past twelve months.

Let's step back in time only as far as last October, when Tesla Motors opined publicly that "the stock price that we have is more than we have any right to deserve." On that day, the stock closed at $173.15. Fast forward four months and the stock is now 43% higher, at $248.

Today's price pop is the result of an extremely bullish note from Morgan Stanley, in which analyst Adam Jonas more than doubled his stock price target to $320, from $153. The new forecast is based on a 15-year outlook. If you feel like betting on that forecast, ask yourself: What is the degree of confidence anyone can have regarding the size and profitability of Tesla Motors in 15 years' time?

Make no mistake about it: Jonas' assumptions are very aggressive. Even his bearish scenario -- which values the shares at just $100 -- has Tesla growing its auto production roughly tenfold to 220,000 vehicles by 2020 (from 22,400 last year). The base case scenario behind his $320 price target has Tesla manufacturing 370,000 vehicles per year by 2020.

I have written before of my admiration for Tesla Motors and its CEO Elon Musk. What they have already accomplished is nothing short of remarkable and there is good reason to be excited about what they may yet accomplish. However, the stock must really be analyzed as a separate beast -- one that is now being driven by momentum "investors" and/or starry-eyed growth investors.

I have some sympathy for the second constituency; to quote Economics Nobel laureate Daniel Kahneman: "The combination of optimism and overconfidence is one of the main forces that keep capitalism alive." However, if you're going to be a "public market venture capitalist," you need to be prepared for the possibility -- perhaps even the likelihood -- of a permanent and significant loss of capital if the rosier-than-rosy scenario that is embedded in Tesla Motors' stock price on doesn't come to pass. By my (sober) reckoning, that price is now divorced from even an optimistic outlook for the company's fundamentals.

Alex Dumortier, CFA, has no position in any stocks mentioned; you can follow him on Twitter: @longrunreturns. The Motley Fool recommends and owns shares of Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
^DJI
$29,296.79 (-2.11%) $-630.15
Tesla, Inc. Stock Quote
Tesla, Inc.
TSLA
$223.07 (-6.32%) $-15.06

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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