U.S. stocks are starting the week with a small gain. The Dow Jones Industrial Average (^DJI +1.24%) and the broader S&P 500 (^GSPC +1.46%) are up 0.40% and 0.44%, respectively, at 1:45 p.m. EDT. The Nasdaq Composite was up 0.69%.
It was the heyday of the late 1990s Internet bubble: In December 1998, a young equity analyst from CIBC Oppenheimer named Henry Blodget threw out the rule book, raising his price target for web retailer Amazon.com from $150 to $400. In justifying the new price target -- which struck many observers as ludicrous -- Blodget wrote that "[Amazon.com] is in the early stages of building a global electronic-retailing franchise that could generate $10 billion in revenue... within five years."
In a note published this morning, Morgan Stanley analyst Adam Jonas made a similar call with regard to Tesla Motors. Mr. Jonas lifted his price target for the electric auto manufacturer's shares from $280 to $465 (the stock was trading at $254.32 at 1:45 p.m. EDT).
"Selling miles in addition to selling cars"
What could possibly justify a two-thirds increase in the price target? An entirely new business that could, in Morgan Stanley's estimate, be worth almost as much as that of selling electric cars: "Tesla Mobility." Here's how Mr. Jonas characterizes the opportunity (my emphasis):
Tesla is uniquely positioned, in our view, to solve the biggest flaw in the auto industry, <4% utilization, via an app-based, on-demand mobility service [...] Given the pace of technological development both within Tesla and at rival technology and mobility companies, we would be surprised if Tesla did not share formalized business plans on shared mobility within the next 12 to 18 months [...] We view this business opportunity as potentially additive to Tesla's existing model of selling human-driven cars to private owners and see potential for this model to conceivably more than triple the company's potential revenues by 2029.
Here's how Mr. Jonas arrived at his new price target, with an average of a base case and a bull case:
I think we can agree that Tesla possesses some advantages, should it decide to develop this business, but is it really "uniquely positioned" to do so? It seems to me that is discounting the potential competitive threat from aggressive ride-sharing provider Uber, not to mention Google, which is developing driverless cars.
While I don't think it's a waste of time to ponder this question, I think it's premature to assign a 50% probability to a scenario that has Tesla Mobility accounting for 40% of the company's value -- particularly since Tesla has yet to even announce plans to enter the business.
Furthermore, it's worth keeping in mind that Mr. Jonas has a history of wildly bullish calls on Tesla:
-
Back in March, for example, he told clients in a video that Tesla shares "can realistically multiply by ten."
-
In February of last year, he more than doubled his price target from $153 to $320. At the time, he wrote that the company's shares contained massive "optionality," stating: "Tesla's quest to disrupt a trillion-dollar car industry offers an adjacent opportunity to disrupt a trillion-dollar electric utility industry. If it can be a leader in commercializing battery packs, investors may never look at Tesla the same way again." Note, however, that in his latest "bull case" (see above graph), Tesla Energy only represents 14% of the company's value.
Amazon's shares achieved Henry Blodget's price target on Jan. 6, 1999, just three weeks after he made the call (and they have risen nearly eight-fold since then). However, it's interesting to note that he thought Amazon's operating margins could ultimately exceed 10% "if the promise of digital delivery of music, books, software and other products comes closer to reality over the next several years."
That promise has been amply fulfilled, but 16 years on, Amazon's operating profit margin has never come close to 10% (it reached an annual high of 6.4% in 2004; last year it was 0.2%, according to data from Bloomberg).
That illustrates the difficulty of making long-range predictions about disruptive emerging companies. Could Tesla achieve what Mr. Jonas has described? I think there are similarities between its visionary CEO Elon Musk and Amazon's Jeff Bezos. As such, I wouldn't bet against Tesla; nevertheless, investors who wish to bet on it need to understand that, at its current valuation, the stock represents nothing less than a speculative venture.
