The key risk for Tesla (TSLA -2.76%) stock is demand, Stifel Nicolaus analyst James Albertine said on Monday in a research note (via Street Insider). But even this risk is minimal, he says. "[G]iven (a) competitors' apparent unwillingness to fully invest (resources/managerial autonomy), and (b) TSLA's brand resilience in spite of high-profile accidents/fires/recalls, it seems demand deceleration may be a late decade call at the earliest." Albertine is betting big on the stock, upgrading from a hold to a buy and a price target of $400.
The market was apparently encouraged by Albertine's report. Shares have jumped by 5.5% at the time of this writing, surpassing $280. This is a new all-time high for Tesla stock.
Shares have been on a tear. Twelve-month and year-to-date returns are 65% and 20%, respectively. While the gains are nice, some shareholders may be getting nervous. Has the momentum entered irrational territory?
Four hundred dollars for Tesla stock is quite a price target. Not only is it 40% higher than today's price, but also the target would put Tesla's market capitalization near that of its mass-market U.S. peers Ford and General Motors. At $400, Tesla's market cap would near $50 billion. Ford and General Motors have market capitalizations of $68 billion and $56 billion, respectively.
To put the bullishness of this price target in perspective, consider that in the trailing 12 months, Tesla's revenue was about $2.5 billion while Ford and General Motors recorded $147 billion and $157 billion in revenue, respectively. Obviously, there are some seriously optimistic forward-looking expectations priced into both Tesla's $35 billion market capitalization today and this $400 price target by Stifel Nicolaus.
Indeed, optimistic expectations are essential to Albertine's price target. As the company is a key niche player in the luxury car market today, Albertine is betting on Tesla's growth story to continue solidly in the coming years.
"As U.S. vehicle sales settle into a 16.5mm-17mm unit run-rate through mid-decade, we tend to favor OEMs with clearer brand messages, differentiated curb appeal, and opportunities to scale abroad," Albertine said in his research note. Tesla, Albertine asserts, fits the bill.
Albertine isn't the only analyst with huge expectations for Tesla stock.
Morgan Stanley analyst Adam Jonas has a $320 price target on the stock. Like Albertine, Jonas is betting Tesla is going to further explode onto the luxury market -- particularly with the help of its model X. In a note to investors last month, Jonas explained:
We'd be disappointed if the Model X did not sweep every major Car of the Year award on offer by the automotive media. Taking nothing away from the Model S as an exciting, historically important vehicle, Tesla has learned many valuable lessons since the development of its first entirely in-house designed and engineered product. Tesla has far greater financial and technical resources at its disposal to apply to the Model X line that did not exist for the Model S.
Albertine could be right
Of course, the key word here is could. Investors certainly shouldn't count on such a considerable gain in just 12 months. Even more, it's arguably impossible to predict any stock movements in such a short period of time.
But Albertine does capture Tesla's biggest advantage: a razor-sharp and intensely focused value proposition that stands out starkly from that of its peers. Over the long haul, this could help Tesla max out its Fremont, California, production capacity, which Tesla CEO Elon Musk said is around 500,000 vehicles per year.
Hitting 500,000 vehicles per year by 2020 on the strength of continued demand for its Model S and hopefully mind-boggling demand for its Model X and Model 3 is just one of the monstrous expectations priced in to Tesla shares today. Other expectations include timely execution on Tesla's $5 billion Gigafactory and management's ability to keep up Tesla's superior gross profit margins. Today, Tesla's automotive gross profit margin minus zero-emission vehicle credits is 27%. The company anticipates to hit 28% by year-end.
Investors considering buying Tesla shares today should carefully consider the wildly optimistic future expectations priced into the stock. At the same time, the company's impressive execution continues to give investors a reason to hold on to the stock, despite its soaring value.