Is There More Spark in Tesla?

Sejuti Banerjea

Tesla TSLA shares have surged 66% over the past month taking its valuation above that of General Motors GM, Volkswagen and Fiat Chrysler FCAU combined. Shorts are also at a one-year low of 15% (according to S3 data) as easy liquidity increased momentum in a stock that has seen a steady flow of positive news, including several upgrades and price target increases from sell-side analysts.


And despite the soaring prices, the eccentric CEO Elon Musk (and foremost Tesla bull out there) increased his stake to 34.1 million shares or an 18.5% share of the company. And not one to pass up an opportunity, especially given the investments the company has scheduled to bring new models and factories online, he initiated another public share issue. Despite the resultant dilution, 2.65 million shares were lapped up and the deal's underwriters exercised in full the option to buy another 397,500 shares, netting $2.31 billion for the company.

So the big question on everyone’s minds is this: how much higher can it go?

Bernstein’s Toni Sacconaghi, seemed compelled to raise his price target to $730 from $325. While this is below current levels, the earlier target just doesn’t make sense any more. Especially given that the analyst believes Tesla’s addressable market will grow 30X over the next 20 years, so even if it loses half its market share, it will still grow 15X. He also sees additional opportunity in trucks, self-driving, battery technology and solar markets.

Speaking of trucks, the Cybertrucks Owners Club is saying that the Tesla vehicle has received 522,764 preorders, which seems unlikely given its strange-looking design and demo faux pas that left it with a cracked window. Neither Tesla nor Musk has confirmed these numbers. The last time Musk said anything about it was in November, when he said 250,000 preorders had been received.

“Investors feel much better about Tesla’s ability to be sustainably profitable; Model 3 demand remains healthy; [gross margins and operating expenditures] are both poised to materially improve... competition is sputtering; and product and production pipelines are robust,” says Sacconaghi. “We are skeptical that upside possibilities are likely to be expunged any time soon — suggesting no imminent negative catalysts for the stock.”

 “Notably, Tesla is the single fastest-growing large-cap tech stock today, and the scarcity of such a profile inevitably commands a premium, especially in this market,” he explains.

Piper Sandler’s Alexander Potter and Winnie Dong are even more optimistic, raising their one-year price target from $729 to $928 a share. They seemed impressed with their own experiment of installing a solar-based system to charge a Model X.

“It’s easy to forget that TSLA sells batteries and solar power products; after all, the segment was only 6% of sales in 2019,” they wrote in their note. “But management says that the solar+storage business will one day rival the automotive segment, and if this is true, then investors will eventually need to pay attention.”

Morgan Stanley analyst Adam Jonas raised his one-year price target to $1,200 on Tuesday, from the previous level of $650 a share as analyst calculations aren’t making sense any more and the opportunity appears immense.

And that isn’t all. Seems some enthusiasts remembered Musk’s statement at the 2019 shareholder’s meeting that “It will not be long before we have a 400-mile range car.” Tesla has greater range than the competition anyway, but it’s been tweaking that with software improvements. Jason Hughes, a Tesla parts reseller while reverse engineering Tesla’s new battery management system (BMS) firmware has discovered that the new battery pack would bring a 400-mile range to some of its cars. Of course this means even more demand and so, more orders for the EV maker.

Conclusion

The sky seems to be the limit for Tesla now. But there’s obviously a risk to the shares given the almost bubble-like rally. That’s why we have a Zacks Rank #3 (Hold) rating on the shares now.

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