If Tesla has finally put worries about operational chaos and financial instability behind it, how high might its share price fly?
That question has transfixed Wall Street in recent weeks and offered a powerful vindication of chief executive Elon Musk following a controversial period. The US electric-car maker's market value soared to almost US$99 billion ($149.7b) several days ago, up from a low point of US$32b in the middle of last year.
The sharp rally has left most Wall Street analysts struggling to justify their much lower share price forecasts — while giving the Tesla bulls new confidence to predict that the stock will move even higher.
In the middle of 2018, Pierre Ferragu, an analyst at New Street Research, came up with the Street's most ambitious forecast at US$530 a share. That price was topped for the first time this week. Ferragu now argues that the company's clear technology and product lead over other carmakers could justify a share price of as much as US$2,000.
But he also warns that failure to maintain that technology edge would turn Tesla into just another carmaker, with a mediocre valuation to match. He says the one thing that has not changed after the latest rally is that "the spread between the bull case and the bear case is going to remain extreme".
Tesla's share price breakout has been a painful moment for the speculators who have long bet against Musk.
According to research group S3 Partners, losses suffered by short sellers since the start of the year have already topped US$3.27b. There has been relatively little short-covering in the face of the latest rally, meaning that the price spike has been the result of new bets on the company rather than a short squeeze, said Ihor Dusaniwsky, managing director at S3.
The short interest in Tesla has steadily ebbed since last summer as a more positive mood has taken over. Shares out on loan to investors betting that the price will decline have dropped from 43.7m in the middle of last year, or 24 per cent of the outstanding stock, to 26.3m at the end of 2019, the lowest level in a decade.
After surprisingly strong quarterly earnings three months ago, the company's vehicle delivery numbers early this month set the tone for the new year and fuelled the latest US$100 leg of the share price rally. The same week, Tesla started delivering vehicles to customers in China from a new production plant in Shanghai, less than a year after it broke ground there.
China's electric-car market is struggling as buyer incentives decline, and an economic slowdown has left a cloud over demand this year. But the speed at which Tesla has launched production stands in stark contrast to the delays in the US since the launch of the Model 3 in 2017.
The recent performance has helped to dispel worries about Tesla's ability to operate as a volume manufacturer and increased confidence in the next steps in its expansion: the launch of the Model Y crossover this year and its first pick-up truck in 2021, with further geographic expansion planned through a plant near Berlin.
"It has become a more credible execution story," said Philippe Houchois, an analyst at Jefferies. He attributes the success to a more mature attitude on the Tesla chief executive's part: rather than trying to reinvent everything in the car-manufacturing process, for instance, Musk has backed off from his overly ambitious automation plans, he said.
Along with the heightened confidence in its operational performance, Tesla is benefiting from a new-found confidence in its financial stability. Less than a year ago, bankruptcy rumours were rife, adding to huge volatility in the stock. They were stoked by Musk's personal insistence that Tesla would not turn to Wall Street for more money, even as its cash reserves dwindled.
In the end he capitulated, raising more than US$2b last May, including selling shares at less than half their current level. It was a climbdown, but served to end the financial doubts. Since then Tesla has strung together two quarters of positive operating cash flow totalling US$1.6b, and this year Wall Street is expecting it to report net profits of about US$1b, after losses totalling nearly US$5b over the previous five years.
If Tesla's more reliable financial and operational performance have put the business on a stronger footing, however, it cannot entirely explain a share price that has flown so far ahead. At close to US$100b, its market capitalisation is nearly double that of General Motors, a company with net income of US$8b last year and nearly 20 times the number of vehicle sales.
Tesla is also facing serious competition for the first time, as bigger carmakers get serious about electric vehicles. "If it remains an overly competitive industry with too many players, all the advantages will be competed away," said Houchois.
Adam Jonas, the Morgan Stanley analyst who was once among the biggest Tesla bulls, is one of those warning of a moment when Tesla loses the lustre it enjoys as a hot tech company. Late last year, he stuck to his share price target of US$250, arguing that the current burst of enthusiasm for the stock will be followed by a moment when the company is seen, and valued, "more like a traditional auto OEM".
The prospect that Tesla's early lead in electric vehicles will erode has led some analysts to search for other reasons beyond the car market to justify its soaring shares.
Chief among these is using the fleet of privately owned Teslas already on the roads to launch a robotaxi service. Musk has claimed that Tesla owners will soon be making extra money by allowing their private cars to operate as driverless taxis — something that he predicted last year would mark the company's transition to sustained profitability for the first time.
Fund manager Ark Invest predicted this week that the robotaxi business could lift Tesla's shares to as much as US$6,000. But with the prospect of fully autonomous vehicles receding further into the future, most analysts have remained wary of attributing any value to this hypothetical new market.
A second argument for Tesla's higher valuation lies in Musk's claim that it is set to become a broad-based alternative energy conglomerate. According to Houchois, selling batteries for other uses could open up big new markets as the company capitalises on its technology and large-scale cell production. But this is yet to take shape, and another new market that Musk has been enthusiastic about — selling solar roof tiles — has failed to take off.
According to some fans of Tesla, the justification for the company's soaring stock price comes from a more prosaic direction: its ability to produce and sell electric cars that are far better than others on the market.
Ferragu argues that Tesla has established a product edge that will be much harder for rivals to match than is generally recognised given the steady improvements it has made in the seven years since the launch of its Model S. He predicts that maintaining that lead could leave it with a 30 per cent share of electric-car sales by the middle of the decade.
Given the motor industry's low margins and price/earnings multiples, even that level of success might not justify the company's soaring valuation.
However, fans like Ferragu maintain that Tesla can change the economics of the business itself, with a new model based on things such as internet-based sales and a heavy software component that will boost the value of its cars.
Written by: Richard Waters
© Financial Times