Is Tesla the ultimate growth stock?


It may seem difficult to think of a stock that trades with all of the intensity of a tech-sector momentum name as a long-term play, but at $243 and rising back toward its $291 all-time high after-earnings report on Wednesday, that's the bet some investors are making on Tesla Motors.

The fate of Tesla's zooming stock price depends, above all, on this question: What matters more, long-term potential or short-term execution?

Scott Mlyn | CNBC

Another way to frame Thursday's 4 percent bounce in shares of Tesla Motors is Wall Street struggling through the eternal question with growth companies: What matters more, problems now or potential for (not too many) problems later?

Tesla's third-quarter earnings report late Wednesday gave ammunition to skeptics, who pounced on lower-than-expected sales and production delays, including a three-month delay in next year's rollout of the Model X SUV. The optimists, meanwhile, pointed to comments from Tesla CEO Elon Musk that the company could grow 50 percent a year indefinitely, even without introducing new models to complement its Model S sedan.

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Bulls won the debate on Thursday, but one analyst compared the many qualifications and one-time charges in the most recent earnings report to something GM would have released around 2005.

Many investors we speak with seem convinced of the Tesla investor thesis but just needed to see the stock with 'a 1 handle' on the share price. We think this may not happen, folks.
Adam Jonas
Morgan Stanley analyst

What you emphasize in the Tesla narrative explains conclusions as different as Stifel Nicolaus' James Albertine, who thinks Tesla is worth $400 a share today, and Barclays' Brian Johnson and Goldman Sachs' Patrick Archambault, who argue Tesla is worth $220 and $216, respectively—each below its current price of $242.

All the analysts project that Tesla will be bigger and more valuable one day than it is now. The argument is over how bumpy the road will be to get there and whether that matters to investors.

"The bumps don't matter, because there is no competition there,'' said Theodore O'Neill, Ascendiant Capital Markets analyst. He added that other luxury car makers aren't close to producing long-range electric vehicles comparable to Tesla. "They're taking share from Porsche, BMW, Mercedes, Audi and Jaguar, and none of them have figured out a way to stop it. Bumps like that in a normal environment would let competitors swoop in. That's not happening," O'Neill said.

"If they have to put off the Model X a little longer to make sure it's all right, I'm totally OK with that,'' O'Neill said. "The customers are still there.''

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For optimists, the core of the argument is Musk's claims that the Model S alone is enough to sell 50,000 cars next year and grow 50 percent annually for the foreseeable future. By 2018, that could put Tesla past $16 billion in sales. That would be even before it sells a single Model X—expected to cost close to the $100,000-plus price tag of a Model S—or any of the Model 3 sedans the company hopes will let it push into the larger market of more affordable cars, costing $30,000 to $35,000.

"The demand argument has been the biggest bear argument on Tesla, and they knocked that out of the way," said Robert W. Baird analyst Ben Kallo on CNBC.

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On top of that, Tesla is building a sharply different financial profile than other car makers.

In the third quarter, Tesla's gross margin was 29 percent, meaning it costs just 71 cents out of each dollar of sales to make the product. That's already twice as high as Ford's 11.6 percent, even without extending the benefits of scale Tesla has already begun to realize.

"You've got [rising prices], and margins are going in the right direction." Albertine said on CNBC. "The air pocket on profits is production.''

For all the talk about how much it might cost to build Tesla's battery gigafactory and pump up its supply of lithium-ion batteries, it has required much less capital than other car makers.

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Skeptics point out that Tesla's stock market value is more than half that of Ford, but it has much less debt. With Ford owing $119.1 billion in long-term debt and Tesla owing just $2.38 billion, the enterprise value of Ford is actually about $173 billion, still more than five times Tesla's $31 billion.

Musk said on the conference call with analysts that Tesla won't have to raise capital to build the gigafactory—and probably won't tap markets for more capital until it needs factories to build the Model 3—implying that current shareholders will reap bigger gains than if the company sold more stock or debt.

"We are making the Model X [to] serve a purpose of generating great cash flow to support the Model 3, and obviously would reduce the dilution and the amount of capital that we need to raise for the Model 3," Musk said Wednesday. "I think the Model X is going to be something special. I mean, it's sort of an expensive car, but it's really going to be something special."

Tesla's legacy issues

Barclays' Johnson remains less impressed, arguing in a report Thursday that "disruption is easy; execution is tough."

His case for Tesla at $220 emphasizes the company's litany of little problems and changes in its story over time. In Wednesday's announcement, that included a delay in the introduction of the Model X to next year's third quarter from a launch that was set for the second quarter; a smaller-than-expected sales gain; and a 2-cents-per-share profit that would have been a 22-cent loss—missing forecasts—if not for a larger-than-expected gain from selling tax credits for zero-emission vehicles to other car makers.

Tesla also said it would ship 2,000 fewer cars this year than it had previously estimated and gave guidance that it would earn a profit of 30 cents to 35 cents a share in the fourth quarter, well below the 75 cents previously forecast. Though new guidance for 50,000 Model S deliveries next year is more than the 41,000 Johnson had predicted, he wrote in a note to clients.

"As much as Tesla fashions itself as a different company than the legacy [manufacturers], the 3Q print reminded us of some mid-2000s quarters from the old GM,'' Johnson wrote, arguing that investors should wait for Tesla to stumble before buying into its long-term potential.

"Near-term rough edges [were] wrapped up with a rosy outlook for next year. ... If fourth-quarter guidance was cut due to manufacturing inefficiencies," he continued, "what's to say that there won't be risk to production in 2015?"

A stock chart headed for $1,300?

Goldman Sachs' Archambault thinks Tesla is worth a little bit less than its current price, though in a report Thursday he wrote it could hit $1,300 over time if electric vehicles ever get 5 percent of the car market.

He's more conservative, because his earnings model assumes EVs claim only 1 percent market share by 2025, and because he discounts Tesla's future earnings by assuming a 20 percent cost of capital. That's almost three times the average for automakers, according to a 2013 study by New York University's Stern School of Business.

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The market and stock investors chose to emphasize the growth potential over a "wobbly" third quarter, Archambault said.

Adam Jonas, analyst at Morgan Stanley, said the market made the right call.

"If Tesla shares don't drop below $200 in the next couple of days, we may not see it for a while," Jonas said in his note to clients Thursday.

To Jonas, the important parts of Tesla's report were better-than-expected demand for Model S sedans in the U.S., the expanding gross margins and clues in the company's balance sheet that deposits for Model X SUVs are trending more strongly than investors had realized.

"Many investors we speak with seem convinced of the Tesla investor thesis but just needed to see the stock with 'a 1 handle' on the share price," Jonas wrote. "We think this may not happen, folks."