Are Tesla shares worth $ 90 or $ 780? Wall Street can’t decide

Now that the company is maturing to top-of-the-line status with its addition to the S&P 500 Index this month, what happens next can be boiled down to a few simple questions: What kind of company is Tesla exactly? And how to value the action? However, Wall Street’s responses are wildly different: Goldman Sachs has a price target of $ 780, while JPMorgan Chase’s is $ 90.

“It’s what people want to believe Elon Musk is promoting,” hedge fund manager Jim Chanos told Bloomberg TV earlier this month.

Of course, investors who have bought into Musk’s ideas have fared much better with stocks than Chanos, who said he recently downsized a “painful” short position in Tesla that he has held for five years at his firm. Kynikos Associates. The electric vehicle maker has reported earnings for five consecutive quarters, accompanied by a more than seven-fold increase in its share price this year and a huge return of nearly 18,000% since the initial public offering in 2010.

Investors who believed in and stood firm in Musk’s vision of transforming the century-old auto industry through the years had to look beyond production issues, delivery errors, mounting losses, stock movements. volatile and an erratic CEO prone to getting into trouble with tweets. .

However, as scrutiny intensifies on the company that will have a top weighting in the S&P 500, investors are struggling to make sense of this automaker that trades well above the lofty valuations they typically enjoy alone. technology companies with very different business models. . Tesla shares are currently trading at nearly 1,000 times earnings, compared to a negligible 14 times for General Motors Co. and 53 times for the NYSE FANG + index.

Therein lies the dilemma. Is Tesla a car manufacturer? Or is it a technology company? Or is it a kind of fusion of both? The company plans to deliver about half a million cars this year, a 36% jump from last year’s levels but slower than the 50% increase it achieved in 2019. Wall Street analysts estimate that revenue They will grow 26% this year and accelerate further in 2021. and then decline until 2022. Profit estimates in 2020 and 2021 have barely budged in the last two years.

However, the most optimistic analysts and investors say that selling cars is just one of Tesla’s many potential endeavors. Active traded fund manager Ark Investment Management, a shareholder and one of the hottest bulls in stocks, estimates that the company’s stock price will reach $ 7,000 by 2024. That calculation assumes that Tesla will not just make electric cars. much more efficiently than traditional ones. with internal combustion engines, but they also operate a fully autonomous taxi network.

Right now, Tesla is not only the world’s largest automaker by market value, it is worth more than GM, Ford Motor Co., Toyota Motor Corp., Volkswagen AG, and BMW AG combined, leading to the question: How exactly are they? investors who value this company?

Musk himself said in May that Tesla’s stock price was “too high,” and earlier this month he warned employees that the stock can “crush like a souffle under a mallet” if investors ever conclude that they cannot achieve the gains that they are. hoping it will work in the future. Tesla did not respond to a request for comment for this story.

Below are edited excerpts from interviews with two top Wall Street analysts about how they are valuing the company. Morgan Stanley’s Adam Jonas has the equivalent of a buy rating on the stock and a price target of $ 540, almost $ 70 below his current price. Meanwhile, JPMorgan’s Ryan Brinkman calls it the equivalent of a sale and has a target of $ 90.

Adam Jonas, Morgan Stanley Analyst

• How do you see Tesla’s current market capitalization and how do you value the shares?
• Tesla is a car company in the same way that Apple is a phone company. As the car connects to the internet, many other addressable markets are opening that were never historically available to car companies, and even today, because of the way most car companies design their cars, those markets still they are not available to them. Tesla is taking people away from valuing and analyzing the company simply by using the number of units sold and the price of the car, and taking into account the installed user base and the software and content services offered to those users. In the process, it steers you away from comparing Tesla to car companies, and should rather be compared to software-as-a-service companies.
• Of our $ 540 price target, $ 254 is attributed to the core auto manufacturing business, $ 154 to the network services business opportunity, $ 58 to the potential to become a third-party powertrain and battery supplier, $ 38 to mobility and shared trips. business opportunity and $ 25 for the insurance and energy business.
• Do you think Tesla deserves its current valuation or has the stock soared too fast?
• By order of magnitude, it highly deserves your assessment. But with a history moving as fast as Tesla and with a shortage of investors to voice that opinion, the stock will certainly trade above any analyst or investor’s fair value estimate.
• Apple used to be seen as expensive at 15 times P / E and is now considered quite cheap at 30 times P / E. That happens when the narrative changes and changes its business model from selling devices and hardware to include platform rigidity as well. .
• What is your advice to investors wondering whether to buy Tesla before the inclusion of the S&P 500?
• I did not include any implications of including the S&P 500 in my valuation at all.
• What company or companies can be a good comparison for Tesla?
• It is not comparable to the automotive companies. Think of Tesla as a Climate Change Innovation ETF, or ESG. For your energy business, we look at solar companies, for the car business, you can look at Apple when it was growing really fast or the valuation of SPACs, and for the service business, we look at SaaS companies.

Ryan Brinkman, Analyst at JPMorgan

• How do you see Tesla as a company and how do you value stocks?
• At the end of the day, the investments are worth the discounted value of your future cash flow. When we tried to reverse engineer Tesla’s current market value to see what assumptions might be included in it, we found that it requires revenue and margins that are really hard to imagine. Tesla’s valuation is now nearly twice that of Toyota and Volkswagen combined, but those two companies together sold 22 million vehicles last year. They generated $ 40 billion in earnings before interest and taxes. So will Tesla grow to approach something like twice the profits of the two largest automakers in the world today together? … Something like this could be embedded in stocks.
• We have a $ 90 price target on the stock and that still implies a market value for Tesla that is larger than GM. It’s just a low price target compared to the current stock price.
• GM sells 6 million vehicles today and Tesla sells 500,000. However, the perception is that I have such a severe opinion about the company. I think I have a severe view of Tesla only in relation to the super enthusiastic view that the market has of the company.
• Do you think Tesla deserves its current valuation or has the stock soared too fast?
• Clearly the stock has risen too fast, too soon. I think this company is going to be a lot bigger in the future, but they will need to grow a lot more to justify the current share price.
• Investors should be prepared for stock price depreciation rather than appreciation, and that can happen even as the company becomes much larger and much more profitable. Because it’s not about whether they can be doubled or tripled as they need to do a lot more than that.
• What is your advice to investors wondering whether to buy Tesla before the inclusion of the S&P 500?
• I would ask them to analyze the fundamentals working from the current price of the stock and try to think about what future unit volume, income and margin estimates may already be included in the stock price, and to really wonder if they find those assumptions. reasonable and probable. If they find them likely, then they can buy at these levels. But perhaps by doing the analysis first, they may come to believe, as I do, that the stock valuation has become detached from the fundamentals. At a minimum, potential new investors in Tesla should understand that there is speculative fervor right now and that the stock is heavily influenced by emotion and psychology and is therefore bound to be highly volatile.
• What company or companies can be a good comparison for Tesla?
• In terms of what this company will look like in the future, I see it primarily as an automaker, although a minority of its revenue comes from additional potentially faster-growing end markets. From an end-market automotive perspective, the size and profitability of a Daimler or BMW may approach in the next decade. That doesn’t mean it should be trading in Daimler or BMW multiples right now, of course, given their faster growth and additional end-market option.