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Morgan Stanley Weighs in on Tesla’s Valuation after Spike

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Morgan Stanley weighed in on Tesla’s (TSLA) valuation after the stock reached a record high and crossed the $420 price level. The brokerage has an “equal weight” rating on Tesla with a bear case target price of $10 and a bull case target price of $500. The stock has been on fire in the fourth quarter. Notably, Tesla is outperforming Ford (F) and General Motors (GM).

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Tesla’s valuation 

Tesla stock crossed the $420 price level earlier this week and rose to a record high. The price level is crucial. Last year, CEO Elon Musk tweeted that he might take the company private at $420 per share. However, the tweet got him in trouble with the SEC. Since the stock soared past $420, Musk might have gotten sweet revenge.

Meanwhile, as Tesla stock soars, Wall Street is as divided about its valuation. Ashwath Damodaran, popularly known as the “dean of valuation,” also got Tesla’s valuation wrong. His target price suggests an almost 55% downside from Tesla’s current prices. Tesla is among the most polarizing stocks recently with target prices ranging from $0 to $4,000. I can’t think of another stock with such a big dispersion in target prices.

Morgan Stanley on Tesla’s valuation

Morgan Stanley weighed in on Tesla’s valuation as the stock reached record highs. The brokerage has a base case target price of $250 on Tesla with an “equal weight” rating. However, Morgan Stanley has a “bull case” target price of $500 and a bear case target price of $10. Earlier this month, Morgan Stanley raised Tesla’s bull case target price from $440 to $500 due to optimism about China’s Gigafactory and Cybertruck.

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According to CNBC, Morgan Stanley analyst Adam Jonas said in a note to clients that “We are not bullish on Tesla longer term, especially as, over time, we believe Tesla could be perceived by the market more and more like a traditional auto OEM.” However, he expects the sentiments to stay strong in the first half of 2020.

Technology or automotive company?

Tesla fans see it as a technology company in Amazon (AMZN) and Apple’s (AAPL) league. However, many analysts and some Tesla critics argue that the company is ultimately an automotive company. The characterization is important because valuation multiples are much higher for technology companies compared to automotive companies. I think that Tesla is a mix of technology and automotive. If Musk’s vision for energy operations becomes a reality, Tesla could be a mix of solar, automotive, and technology.

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Tesla’s conundrum

If we look at Tesla’s valuation, it’s a conundrum. While sell-side analysts would use DCF valuation for Tesla, it would ultimately boil down to an idiosyncrasy. Also, the company’s energy and autopilot could be huge earnings drivers in the long term. However, they might not contribute much to the earnings right now. The company might even license its software or battery technology to other companies. You have to look at a lot of variables to determine Tesla’s valuation.

Idiosyncrasies and possible biases

Arguably, that’s the case with practically every company. Different analysts arrive at various target prices based on their assumptions of future cash flows and earnings. However, unlike Tesla’s valuation, the divergence is much lower for established companies with an almost linear earnings history. However, Tesla isn’t a linear but exponential growth story looking at the top-line growth. The bottom line has always been a concern. The company has only been profitable in a handful of quarters. Still, Tesla commands a higher market capitalization than Ford and General Motors.

Target price

While assigning Tesla a target price, some optimistic analysts might have high demand and margin projections. However, some critics might not have rosy projections. Tesla could be a textbook case of emotional bias in investing. Wall Street analysts and the investing community are divided about Tesla. The company’s valuation is only part of the disagreement. To learn more, read Tesla Stock: Are You Bullish, Bearish, or Just Neutral.

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