By Robert S. Bacarella | February 3, 2020
Tesla is a controversial stock, as reflected by the range of Wall Street analysts’ price targets—from $190 to over $800. This valuation range is about twice that of the average stock in the Dow Jones Industrial Average.
Some analysts believe that Tesla’s bull run is just beginning, while others think it is about to unravel… and opinions are strong on both sides.
The Tesla Bulls
Tesla bulls believe that the company is not just an auto manufacturer but also a leading-edge technology company. It is led by the iconic CEO Elon Musk, who is thought to be following in the footsteps of Apple’s Steve Jobs or Amazon’s Jeff Bezos. Tesla has instant name recognition…when a consumer thinks about an electric vehicle, they think “Tesla,” not a car manufactured by Ford or GM. Tesla’s valuation reflects the company’s first-mover advantage in the electric vehicle market—uniquely combines style, technology and performance.
Also, to Tesla bulls, raw size doesn’t matter, as Tesla’s total car sales in 2019 represent less than 1% of total worldwide auto sales. Proponents see this as a huge opportunity for future growth. As a result, Tesla’s stock market value ($88 billion) has now eclipsed the combined market values of GM ($49 billion) and Ford ($37 billion) of $86 billion.
The Tesla Bears
Tesla bears believe that bullish investors are looking at the company through rose-colored glasses. They are ignoring questionable consumer demand, the company’s high debt level, low profit margins that restrict profitability, poor cash flow and increased competition coming into the market.
The bears question Elon Musk’s management style. Although respected by employees, Musk is cited as not easy to work for, a micromanager who is somewhat impulsive. He does not adhere to a CEO template. He doesn’t have a desk at the Tesla factory, but rather moves to the area where the biggest problems are. He believes that one should lead from the front lines, as a leader behind the lines is going to lose.
Is Tesla a flower or weed?
To see Tesla as a flower, you must believe in Elon Musk’s master plan to produce more affordable, mass-market electric cars at a rapid clip. Tesla’s new factory in China is a big step toward addressing the mass market, creating the potential to deliver a significant number of vehicles sooner than expected. Secondly, you must accept the fact that the stock is not trading on a multiple of today’s or tomorrow’s earnings; it is trading on a multiple of Elon Musk’s dreams.
Tesla, no doubt, has been a “flower” in many holders’ portfolios. However, it does require a lot of watering—close attention—as distinguishing which dreams will turn into realities is extremely difficult. It currently is not a “weed” to be pulled, but as conditions change be prepared to react accordingly.