Shares in the U.S. carmaker have more than tripled since late August

Tesla’s stock price has soared faster than a P100D around the Nürburgring. It has more than doubled since the start of November, blowing past record highs and leaving every other member of the Nasdaq 100 in its dust.
Analysts on Wall Street are still struggling to make sense of it. To some, it is a reflection of tangible signs of progress at the electric car maker, which reported fourth-quarter results this week that beat revenue forecasts and sent the shares up another 10 per cent or so. It was not long ago that the company was up against it, cutting its workforce, missing sales estimates and tapping investors for US$2.7 billion in cash.
Even so, the trajectory of Tesla’s share price is causing even bulls to wonder if the company is really worth it. Analysts’ average price target for the U.S. automaker has leapt to US$420 from US$299 in the span of just one month — for a stock that just reported quarterly revenues that were up only 2 per cent and net profits 25 per cent weaker.
Seasoned pros are having to scramble to keep up. At BofA Securities, for example, managing director John Murphy said this week that “overblown” investor optimism was reason enough to keep his “underperform” rating. Even as he did so, he bumped up his price target from US$240 to US$350.
Ditto Patrick Hummel at UBS, who resumed coverage last week with a “sell” rating — while more than doubling his price target to US$410.
Other PTs range from US$62 to US$764. “There’s a world of difference between the bulls and bears,” said Wedbush analyst Dan Ives.
To make sense of the numbers, the most common refrain for analysts is to talk about Tesla’s “story”, and how investors have been sold on it.
Enthusiasts have long hailed the company for leading the electric vehicle charge in an evolving auto industry. The bulls are betting that Tesla — the first U.S. carmaker to break a US$100 billion valuation — can ramp up global production and sustain a technological advantage over rivals, while fending off competition from the likes of Porsche and Audi.
That narrative is particularly focused on growth prospects in the world’s largest car market, China. Tesla’s new plant there has begun building Model 3s, and production of the Model Y sport-utility vehicle will follow.
A second consecutive profit in the December quarter and guidance that deliveries “should comfortably exceed” 500,000 vehicles in 2020 gave investors more reason to believe in the company’s growth plans. In its fourth-quarter report, Tesla declared 2019 a “turning point” for the company and said the launch of the Model Y was running ahead of schedule, with production in California now under way.
China was “the fuel in the engine,” Ives said. He has a “neutral” rating on Tesla with a US$710 price target, but still has a “bull-case” scenario in which the stock rises to US$1,000, almost one-third of which is tied to opportunities in China.
“We’re still in the early days of the [electric vehicle] transformation playing out,” he said.
Some say the best way to think about the recent surge is to think of short-sellers being squeezed, just like Elon Musk promised in 2018, when the Tesla chief said that its turnround would result in the “short burn of the century.”
Shorts currently account for less than 14 per cent of shares, down from their 2019 peak of almost 25 per cent, according to Refinitiv data. That suggests that many have been forced to close out positions as the stock has rallied. Ives described that squeeze as “massive.”
But at US$641 a share, as Tesla’s share price was overnight on Thursday, plenty of analysts are uneasy. Garrett Nelson at CFRA, who has a “sell” rating on the stock because of a “very frothy” valuation, notes that it is trading more like a “hybrid tech company” than a carmaker. Tesla’s global sales, for example, equate to roughly 3 per cent of General Motors and Ford’s combined revenue. And yet Tesla trades at about 43 times its estimated earnings next year — compared with 5.3 times for GM.
“When Tesla surpassed Ford and GM’s combined market cap, that was pretty staggering in our view,” said Nelson. “We think the market is giving Tesla full credit for growth that hasn’t occurred yet.”
Gene Munster, managing partner at Loup Ventures in Minneapolis, wrote a blog post on Tesla’s long-term bull case a month ago, when the stock was about one-third lower. This week he likened the stock’s projected path to Amazon’s over the past decade, but added: “we’re reminded of the lessons of the dotcom ‘rose-coloured glasses’ approach to investing, which should be kept top of mind. Valuing Tesla on historical tech comps would correctly direct investors to stay on the sidelines.”
Consider it a caution flag.
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