Skip to main content
Open this photo in gallery:

Tesla is expected to report earnings on Jan. 29 and the stock will swing up or down depending on what the report reveals.The Associated Press

The spectacular surge in Tesla Inc.’s stock price has caught even the company’s fans by surprise.

Consider Daniel Ives, managing director of equity research at Wedbush Securities in New York. This week, his voice crackled with enthusiasm over a patchy cellphone connection from China as he discussed the imposing lead the automaker has built up in the race to dominate electric-vehicle manufacturing.

“They’re playing in the NBA and everyone else is playing in college,” he gushed. “They’re miles ahead, in branding, in software and especially in the battery space.”

So what target price does this Tesla admirer have on the company’s stock? His baseline case pegs fair value at US$370 a share – far below the US$510 range where it is now trading.

There is, he acknowledged with a chuckle, a bit of a disconnect between his obvious enthusiasm for Tesla’s accomplishments and his downbeat target price and “neutral,” or hold, recommendation on the stock. That is because the range of possible outcomes for Elon Musk’s empire is so large, he says.

Mr. Ives’s bearish scenario, which assumes problems in China as well as falling profitability and softening demand, values Tesla at US$200 a share. His bullish case, which assumes growing demand in China as well as a speedy rollout of the company’s newest sport-utility vehicle, says it is worth as much as US$600 a share.

Investors everywhere are grappling with the same challenge as Mr. Ives: How do you evaluate the outlook for a company that is still a work in progress, with so many big questions still to answer? Is fair value closer to US$179 (the low that Tesla hit last June) or $510.50 (the price it closed at on Friday)?

Tesla is expected to report earnings on Jan. 29 and the stock will swing up or down depending on what the report reveals. Those who are thinking of buying in should be aware they are signing up for a head-snapping ride.

By now, many professional forecasters are wary of making bold predictions about the automaker and for good reason. Last May, Wall Street’s finest minds raced to see who could come up with the most pessimistic outlook for Tesla. The money-losing company had just cut its work force, failed to deliver as many vehicles as expected and announced plans to raise more than US$2-billion in capital. As the stock slid below US$200 a share, observers at Morgan Stanley and Citigroup warned of bearish scenarios in which Tesla shares could tumble a further 80 per cent.

Instead, Tesla stock began to grind higher in June. It accelerated into overdrive after the company reported a surprise profit in its October financial statement. Better yet, it declared that development of its Model Y sport-utility vehicle was ahead of schedule, with deliveries expected to begin in the summer of this year. Investors cheered the announcement, because Mr. Musk has said he expects sales of the Model Y to eventually outnumber the sales of all other Tesla vehicles combined.

And the good news didn’t end there. In early January, the stock climbed to fresh highs after Tesla announced it had delivered 367,500 vehicles in 2019, meeting the company’s forecasts. The automaker also said it had begun to deliver vehicles built at its new factory in Shanghai, a key milestone in its attempts to conquer the Chinese market.

Rather than falling 80 per cent, Tesla shares have now soared more than 180 per cent since the lows of last year. The stock market value of the upstart car company has swelled to more than US$91-billion, greater than the market capitalization of Ford Motor Co. and General Motors Co. combined.

Despite the galloping optimism embodied in the share price, the doubters remain unmoved. Roughly 18 per cent of the company’s shares are sold “short,” a signal that many investors are betting the share price is poised to tumble.

The skeptics can muster a good case. Mr. Musk’s spiky personality, unpredictable tweets, and past conflicts with securities regulators provide plenty of grounds for worry. So do Tesla’s history of manufacturing glitches and its hefty debt load, as well as growing competition from rival electric vehicles.

However, even cynics can’t dismiss all of Tesla’s achievements. Unlike GM and Ford, which are struggling to generate any growth at all, Tesla’s revenue is expanding at double-digit rates. While its projected 2020 revenues of US$30.4-billion will be barely a fifth of either of those larger automakers, its relatively modest size is also a positive – it means there is a lot more room to grow.

Competition is intensifying, but for now Tesla remains the class of the electric-vehicle sector. In 2019, Consumer Reports named Tesla’s Model 3 sedan the most satisfying car to own, based on survey data from owners of more than 500,000 vehicles. In another vote of confidence, Edmunds.com, the car-rating site, named the Model 3 as its top choice in the luxury electric vehicles category.

“The main thing that hamstrung them was the manufacturing process,” said Mr. Ives, the Wedbush analyst. “They’ve significantly improved there.” He said complaints about Tesla’s build quality, involving paint problems, panel gaps, scratches and dents, are diminishing rapidly. Meanwhile, the company’s “gigafactories” in Reno, Nev., and Shanghai – as well as one planned near Berlin – are providing it with unmatched muscle in battery-pack assembly and other essential elements of electric-vehicle production.

Looking out over the next few years, “China is the key,” Mr. Ives said. He noted that Tesla is the only U.S. automaker to be operating there without a local partner and could benefit hugely if it manages to crack the enormous market. He estimated that the expanding opportunity in China has added as much as US$100 a share to Tesla’s current valuation.

So how bonkers is Tesla’s current share price? It’s actually quite sensible – if you make consistently optimistic, but not outrageous, assumptions about what lies ahead.

David Whiston, a sector strategist at Morningstar, recently put a bull-case price of US$511 a share on the stock – roughly where it is trading now. That assumes Tesla delivers 13.6 million vehicles over the next 10 years and manages to boost its operating margin to 11 per cent.

The problem for investors is that even minor shifts in assumptions can put a major dent in that target price. For instance, if Tesla sells only 12.5 million vehicles over the 10-year forecast period, and achieves only a 9-per-cent operating margin, its fair value today is only US$326 a share, according to Mr. Whiston’s model.

And that’s not the worst-case scenario. If Tesla delivers only 10.5 million vehicles over the next decade, Mr. Whiston’s fair-value estimate falls all the way to US$153 a share. “If our bear case were to prove the reality, the market will go from treating Tesla like a tech stock with a celebrity CEO to an automaker struggling to achieve sufficient profit and cash flow,” he wrote in an October note.

Investors may want to remind themselves about these diverse possibilities before making any large bets on Tesla’s future. The prevailing uncertainty around the company is reflected in the unusually wide spread of opinions on its stock. Ten analysts rate it a Buy, another 10 label it a Hold, while 16 deem it a Sell, according to Bloomberg data.

What troubles many of the most bearish analysts is the company’s lush valuation. After its big gains of the past few months, Tesla shares are now trading for nearly 80 times the company’s forecast earnings for 2020. In contrast, GM or Ford shares change hands for under eight times projected profits.

In a report this week, Morgan Stanley analyst Adam Jonas suggested waiting for a better time to buy in to the Tesla story. In a move that reflects how rapidly expectations for the automaker are shifting, Mr. Jonas performed what you might call a flattering downgrade – he hiked his target price on the stock to US$360 a share from US$250, while simultaneously demoting it from the equivalent of a Hold to a Sell.

His argument is that a bit of patience could pay off for investors. “We are encouraged by Tesla’s execution and think it deserves to be among the world’s most valuable auto companies, and is perhaps the most important auto company in the world given its [electric-vehicle] leadership,” he wrote. “However, we think investors will be presented with more attractive opportunities to own the stock in the future.”

For all but the most diehard Tesla fans, that sounds like an excellent perspective to keep in mind.

Follow related authors and topics

Authors and topics you follow will be added to your personal news feed in Following.

Interact with The Globe