Wall Street still loves Elon Musk and Tesla. Here’s why

By Tori 3 years ago

Now the stock trades at around $800.

So much for concerns about Wall Street overvaluing Tesla (TSLA). Investors — and many Tesla analysts for that matter — are willing to give Musk a pass for his occasionally unconventional social media practices now that the company is generating profits.
In spite of Musk’s penchant for controversy, the stock is up more than 90% this year and has shot up 245% over the past 12 months. Analysts will put up with a lot of odd tweets about his newborn son’s unusual name and his sex life with Grimes if Tesla stock continues to soar.

“As dim as the near-term picture is, Tesla’s long-term prospects are as bright as they have ever been,” said JMP Securities analyst Joseph Osha, in a report after the company’s latest earnings.

Osha, one of the more bullish Tesla analysts on Wall Street, has a $1,020 price target on the stock. He pointed out in his report that “the company has the balance sheet to continue expanding” and that thanks to its $8 billion in cash, Tesla “will be able to ride out the downturn.”

Tesla’s stock is surging despite Musk’s erratic behavior

He also thinks that Tesla will deliver more than 700,000 vehicles to consumers in 2021 — more than the consensus Wall Street estimate of about 630,000.

Tesla’s sales are expected to increase more than 10% this year, an impressive feat given the state of the global economy. And Wall Street is forecasting a nearly 40% jump in revenue for 2021.

Elon Musk is using his power to be selfish
That’s a big reason why Tesla, now worth nearly $150 billion, has a market value nearly five times that of General Motors (GM) and only about $10 billion below the market cap of Toyota (TM).
But is the stock, now valued at more than 200 times 2020 earnings forecasts and nearly 70 times profit projections for next year, overpriced? Ford (F), for example, trades for just 10 times 2021 earnings forecasts.

Oppenheimer’s Colin Rusch doesn’t think so. He said in a report after Tesla’s last earnings release that because of the company’s “ability to disrupt the auto market,” the stock deserves a much higher valuation that is similar to other tech leaders. Rusch raised his price target on the stock to $968.

“We see potential for Tesla to continue growing at accelerated rates through the end of the decade,” Rusch wrote.

Tesla is priced more like a FAANG stock than the Big 3

Still, other analysts are concerned the stock has run up too high too fast.

“The valuation remains astronomical in our view, given fundamentals look more auto than tech,” said Cowen analyst Jeffery Osborne in a report after the first quarter earnings release.

Osborne gave Tesla credit for weathering Covid-19 challenges in China. But he has a $300 price target on the company because he’s worried about increased competition and the possibility that the Model Y will eat into sales of Tesla’s own Model 3. Both are more affordable vehicles than the luxury Model S and X.

“Simply, we see a lot more that can go wrong than can go right,” Osborne wrote.

Investors may also be ignoring the possibility that Musk may finally go too far with his eccentric behavior. Picking a fight with California about reopening the Tesla plant in Fremont could come back to haunt the company — as could the fact that he may be putting the health of Tesla workers at risk.
And while Musk agreed to pay a $20 million civil penalty as part of a settlement with the Securities and Exchange Commission in September 2018 for his August 2018 tweet about having funding secured to take the company private — when no such deal existed — the SEC may continue to keep a close eye on his Twitter feed for the foreseeable future.
There also are lingering worries about a brain drain at Tesla, with numerous high-profile executives departing the company. Some investors wish Tesla had a strong chief operating officer, similar to how Musk’s other big company, SpaceX, has COO Gwynne Shotwell helping to run that company.

Tesla did not respond to requests for comment.

JMP Securities’ Osha said in his report that “the continued management turnover at the company attests to the challenges [Musk] faces as a team builder and leader.”

But investors love a success story. So they’re likely to be more tolerant with Tesla than they were with, say, Uber (UBER), a company whose numerous problems and long rack record of losses led it to oust co-founder Travis
Kalanick as CEO before last year’s IPO, or Papa John’s (PZZA), which dumped chairman John Schnatter after he used a racial epithet on a 2018 conference call.

Osha said that “Musk’s ability to repeatedly achieve what seems impossible is why Tesla exists in the first place, and we can see why Tesla’s board has stood behind him, despite his often erratic public behavior.”

Still, even Musk could find himself in hot water with his board if he continues to act like Elon Musk.

“Elon Musk cannot continue to defy gravity forever though,” Osha added. “Tesla may be better off with a less volatile CEO, with Elon Musk in a creative/technical leadership role.”

Or, as Musk himself tweeted in April 2019, “My Twitter is pretty much complete nonsense at this point.”

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