The sell side gives Tesla Motors a more realistic valuation after the recent decline but the future is still uncertain given the expected surge in demand for battery electric vehicles, which will lead to other carmakers ramping up their electric vehicle segments and provide some serious competition
Standard & Poor’s equity research division has just revised its outlook on Tesla Motors (TSLA), and upgraded its rating on the stock from ‘sell’ to ‘neutral’, with a $130 price target. At the close of trading on November 27, the last session before Thanksgiving, Tesla shares were trading at about $127, with a one-year forward price to earnings multiple of 84x.
In the past few days, a number of sell side analysts have moved to either revise or reiterate their rating on Tesla Motors, with a wide range of views. Dan Galves at Deutsche Bank maintains his favorable view on the stock, giving it a buy rating with a target price of $200, citing a favorable outcome from the recent investigation on the Model S battery fires by the National Highway Traffic Safety Administration (NHTSA) investigation, strong demand in China, where the company recently opened its first retail store, and an expected improvement in margins for the full fiscal year.
On the other end of the spectrum are the analysts at Bank of America Merrill Lynch (BAC) who expect Tesla Motors to underperform in the coming quarters with a target price of $45. Research analysts at Barclays are somewhere in the middle and have revised down their outlook on the company, giving the stock a target price of $120, with an equal weight rating, while Goldman Sachs has reiterated its neutral view and a price target of $104. According to a poll by Bloomberg, 16 analysts are covering Tesla Motors, with a consensus rating of 3.25. Six analysts have a buy rating; six have rated the stock a hold, while four maintain a sell rating. The mean target price given by sell side analysts is currently $154.
Shares in Tesla Motors surged this year to around $193 in early October, but tumbled down to their current level of $126 after three battery fires were reported within a period of six weeks, and the subsequent NHTSA investigation which has eaten away into the largely favorable sentiment surrounding the Model S. The company and its CEO Elon Musk have repeatedly stated that there are no issues with demand, and that the only constraints are from the supply side.
But many investors disagree and expect Tesla’s forthcoming vehicles to face strong competition from large German and Japanese carmakers. Short interest in the company is around 25.3 million shares, which represents around 32% of the total float, up from around 26% from last week. The short interest coverage, which represents the number of days to cover short positions in the stock, has come down from 2.3 at the end of October to its current level of 1.5. This is largely due to the higher average daily volume traded in recent weeks, on the back of increasing interest in Tesla shares that have seen volatile movements in price since its mixed earnings result on November 6.
In its latest quarter earnings release, Tesla beat EPS estimates of 9 cents a share by 25%, and even beat consensus estimates for revenue by 8.7%, which came in a $602.5 million. But its sales were lagging largely due to a constrained supply of vehicles manufactured at its sole factory in Fremont, California.
Analysts expect Tesla to report earnings per share of $0.53 for fiscal year 2013 (FY13), its first full year profit. They also estimate that for FY14, the company will almost triple its EPS to $1.6, on the back of healthy sales of its Model S in international markets, and a favorable debut for the Model X, its second production vehicle slated to be released by the summer of 2014. The Model X is a 7-seater premium crossover. Tesla has also recently started taking orders in Japan, a historically lucrative market for high tech cars.
Some investors believe that after the drop in share price, Tesla’s stock is currently trading at a more realistic valuation, without the success of its future mass-market vehicle being priced in. That seems fair since it is quite difficult to gauge how well the model would fare in the global market since it is still in early stages of development, and slated to be released by 2016. By that time, expect large German rivals like Volkswagen AG (VLKAY) and BMW (BAMXY) to release battery electric vehicles that are more than capable of taking away the early mover advantage that Tesla has in the premium segment.
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