At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
… And then there's Pacific Crest
None of that helps us much with Pacific Crest. The Portland-based stockpicker keeps stubbornly mum on most of its stock recommendations, only rarely letting one slip through a ratings aggregator like Briefing.com. But some news items are pretty hard to keep quiet -- like yesterday's upgrade of Tesla Motors
Yesterday was a very good day for Tesla. First, the U.S. Department of Energy placed Tesla alongside industry heavyweights Chrysler, Ford
According to Energy Secretary Steven Chu, DRIVE aims to "accelerate the development of clean, advanced, energy-efficient technologies for cars and light trucks and the infrastructure needed to support their widespread use." That's right up Tesla's alley.
Simultaneously, and perhaps coincidentally, Pacific Crest initiated coverage on Tesla's stock with an "outperform" rating. The analyst predicted that this $28 stock will reach $38 within 12 months.
[Pause for applause.]
On this happy occasion, I'd like to congratulate all the "DRIVE" appointees, and ask Pacific Crest just one question: "Are you out of your ever-lovin' mind?"
Sure, DRIVE sounds wonderful. But yesterday's DOE press release was long on talk and exceedingly short on numbers. No contract awards accompany Tesla's appointment to DRIVE, nor any grants, loans, or even vague statements of financial support from the government.
Frankly, Tesla really could have used some money. Last quarter, the company lost nearly $49 million, a result 66% worse than it posted a year earlier. The company burned $63.8 million in cash, a number nearly twice as bad as last year's. Over the past 12 months, Tesla's accumulated free cash flow totaled negative $198 million.
How can any analyst recommend buying a stock like this in good conscience?
While I may not agree with Pacific Crest's conclusions, there's a method to its madness. The analyst knows what Tesla's done over the past year. It admits that Tesla will keep burning even more cash -- $400 million in all -- developing its Model S electric sedan, and then burn more building the Model X crossover. As a result, losses could accumulate, and the cash-burn could rise to a towering inferno, over the quarters to come.
But according to Pacific Crest, none of this matters.
Our electric future
According to Pacific Crest, Tesla is all about the far future. The analyst argues that Tesla's financial performance for "the next five quarters" is "irrelevant." Only after the Model S begins production in mid-2012 (anticipated output: 20,000 units annually) will we know how well the car sells at its anticipated $60,000 to $90,000 price tag.
Sell all 20,000 Model S'es at $60,000 a pop, and Tesla instantly becomes a $1.2 billion-annual-revenue business. Its $400 million development cost becomes a footnote, and the company becomes viable. Sell fewer than 20,000, though, and the company's future gets iffier.
Foolish final thought
That's where things get really interesting. Last month, Nissan and General Motors sold 1,067 electric Volts and Leafs combined. That was a nice pickup from March's number (906.) Still, if you run-rate these numbers out across a full year, we're still seeing two of the biggest car companies on the planet selling e-cars at the rate of less than 12,000 units per year -- at prices a fraction of what tiny Tesla will be asking for its Model S.
Maybe Tesla will make a go of it. Maybe Pacific Crest is right, and buyers who turned up their noses at electric econoboxes from GM and Nissan will rush to purchase stylish Model S'es priced "within the range of luxury ICE competitors." Then again, maybe Nissan, GM, and soon Toyota and Ford will eat Tesla's lunch, and the company will never be more than a niche player in this market.
Eight quarters from now, if Tesla's numbers look anything like they will for the next five quarters, investors will likely be pretty Pacific Crest-fallen.
The Motley Fool owns shares of Ford Motor. Motley Fool newsletter services have recommended General Motors, Ford Motor, and Chevron.
Fool contributor Rich Smith does not own (nor is he short) shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 449 out of more than 170,000 members. We Fools may not 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.